<PAGE>
As filed with the Securities and Exchange Commission on May 2, 2000
Registration No. 333-33318
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
INTEGRATED CIRCUIT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 3674-100 23-2000174
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
2435 Boulevard of the Generals
Norristown, Pennsylvania 19403
Telephone: (610) 630-5300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Hock E. Tan
President and Chief Executive Officer
2435 Boulevard of the Generals
Norristown, Pennsylvania 19403
Telephone: (610) 630-5300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
Lance C. Balk, Esq. Mark C. Smith, Esq.
Kirkland & Ellis Skadden, Arps, Slate, Meagher & Flom
153 East 53rd Street LLP
New York, New York 10022-4675 Four Times Square
Telephone: (212) 446-4800 New York, New York 10036-6572
Telephone: (212) 735-3000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained in this prospectus is not complete and may be changed. +
+We may not sell securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 2, 2000
12,500,000 Shares
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ [LOGO OF ICS] +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Integrated Circuit Systems, Inc.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$15.00 and $17.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market's National Market under the symbol "ICST".
The underwriters have an option to purchase a maximum of 1,875,000 additional
shares from some of our shareholders to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Integrated Circuit
Public Commissions Systems, Inc.
-------- ------------- ------------------
<S> <C> <C> <C>
Per Share................... $ $ $
Total....................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Robertson Stephens
Lehman Brothers
Bear, Stearns & Co. Inc.
Pennsylvania Merchant Group
The date of this prospectus is , 2000.
<PAGE>
[Description of cover art: photographs of Integrated Circuit Systems Inc.'s
integrated circuits and applications]
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
The Offering........................ 4
Risk Factors........................ 8
Use of Proceeds..................... 15
The Reclassification................ 16
Capitalization...................... 17
Dividend Policy..................... 18
Dilution............................ 18
Unaudited Pro Forma Consolidated
Financial Data..................... 19
Selected Historical Consolidated
Financial Data..................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Industry Overview................... 38
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business............................ 40
Management.......................... 47
Principal and Selling Shareholders.. 57
Certain Relationships and Related
Transactions....................... 58
Description of Capital Stock........ 60
Description of Indebtedness......... 62
Shares Eligible for Future Sale..... 65
Underwriting........................ 67
Notice to Canadian Residents........ 70
Legal Matters....................... 71
Experts............................. 71
Change in Independent Accountants... 71
Where You Can Find More
Information........................ 71
Index to Financial Statements....... F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
The industry statistical data presented in this prospectus, except where
otherwise noted, have been compiled from industry sources. Although we have not
independently verified the data, we believe that the information provided by
such industry sources in this prospectus is reliable. In addition, statistical
data relating to us presented in this prospectus have been compiled from our
internal surveys and schedules, which, while believed by us to be reliable,
have not been verified by any independent sources.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary is not complete and may not contain all of the
information that you should consider before investing in our common stock. You
should read the entire prospectus, including the financial data and related
notes, carefully before making an investment decision. This prospectus contains
forward-looking statements which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth in "Risk
Factors" and elsewhere in this prospectus. Unless otherwise stated, the
information contained in this prospectus: (1) assumes no exercise of the
underwriters' over-allotment option and (2) reflects the reclassification of
all of our classes of common stock into a single class of common stock and the
1.6942-for-1 stock split of that single class, which will occur immediately
prior to the effectiveness of the registration statement of which this
prospectus forms a part.
Integrated Circuit Systems, Inc.
We are a worldwide leader in the design, development and marketing of
silicon timing devices for a number of high-growth application segments. Our
silicon timing devices are used in a variety of consumer and business
electronics such as personal computers, or PCs, digital cameras, set-top boxes,
PC peripherals and DVD players. Our products are also increasingly being used
in various communications applications including routers, switches, fiber
optics, cable modems and ADSL equipment.
Silicon timing devices are integrated circuits that emit timing signals or
pulses required to sequence and synchronize electronic operations to ensure
that information is interpreted at the right time and speed. All digital
devices require a timing signal and those with any degree of complexity require
silicon timing devices to time and synchronize their various operations.
Growth in our markets is being driven by the rapid pace of infrastructure
development for the Internet, the increasing complexity of our customers' end
products, and the transition from traditional analog devices to digital
technologies. Internet infrastructure expansion is now largely broadband based,
requiring higher operating frequencies and more complex digital equipment. This
advancement has driven the continued proliferation of technologically complex
consumer and business electronic devices that help optimize the Internet
experience. In addition, the transition from traditional analog devices to
digital devices has led to increasing consumer adoption of digital technologies
such as HDTV or DVD players. Our silicon timing devices are well suited to
these developments as they operate in analog and digital environments (i.e.,
mixed-signal) and can manage multiple frequencies, have high programmability
and generally require less power than traditional timing products such as
crystal oscillators, which are predominantly quartz based timing devices that
resonate at a single frequency.
We have developed a reputation for engineering excellence and innovative
technology in silicon timing design. We pioneered the silicon timing market in
1988, introducing silicon timing devices for video and graphics applications.
Since then, we have consistently led the industry with several technical
designs, including delivering the first silicon timing device for the PC
motherboard in 1990. Our ongoing focus on product innovation has led to the
introduction of approximately 424 new products into the marketplace over the
past three fiscal years. We are the leading supplier of silicon timing devices
to several markets, including PCs and digital set-top boxes, and we are
continuing to design and introduce new products for communications equipment
companies such as Motorola, Lucent, Nortel, Cisco Systems, Fujitsu and Alcatel.
Over 40% of our current design opportunities are for communications equipment
companies. A design opportunity reflects a request from a customer or potential
customer for a silicon timing design. In the first six months of fiscal 2000,
we converted over 80% of our design opportunities into design wins, which could
lead to future production orders.
We have developed long-standing and valuable relationships with the majority
of leading original equipment manufacturers, or OEMs, of consumer and business
electronics and communications equipment. We
1
<PAGE>
work closely with these OEMs to develop unique and often proprietary timing,
sequencing and synchronization solutions and are closely integrated into their
product design and development process. Our top OEM customers include such
companies as Asustek, Hughes Networks, Compaq, Dell, IBM, Echostar, Intel,
E-Machines, General Instruments and Hewlett Packard. In the PC market, our
research and development efforts are aligned with Intel's product and
technology road map. Intel made a $13.5 million investment in our company in
December 1999.
For the 1999 calendar year, we had revenues of approximately $150 million,
and over the past three calendar years, we have grown our core revenues at over
25% per year. With continued focus on our core silicon timing devices, our
gross profit has grown from $63.5 million, or a 46.3% gross margin, for the
1997 calendar year to $88.2 million, or a 58.8% gross margin, for the 1999
calendar year.
Industry Overview
As silicon timing devices are critical to the functioning of end-user
consumer and business electronics as well as certain communications equipment,
we expect the market for our products to experience significant growth. In
1999, the total available market for timing devices, which includes both
silicon timing solutions and crystal oscillators, was approximately $2.8
billion. We expect this market to grow 18% per year to over $3.8 billion by
2001. Silicon timing devices represent approximately $378 million, or 14% of
the overall timing market, but we expect it to grow to over $850 million, or
23% of this market, by 2001, a growth rate of approximately 50% per year. The
accelerated growth for silicon timing devices reflects not only the underlying
growth in our end markets, but also the conversion of crystal oscillators to
silicon timing devices in our customers' increasingly complex digital products.
Business Strategy
Our business strategy is to focus on our core silicon timing business and
continue to provide customized and high performance products to our expanding
and diversified customer base. We have a proprietary development process that
allows for the timely customization of our products to a specific application
and our fabless operating model allows us to focus on new product development
and customer relationships. Our specific strategies include:
. Identify and target new market opportunities where there are strong
growth prospects and where we can leverage our core silicon timing
technologies.
. Dominate these new markets by developing multiple application-specific
products to meet the needs of our customers and create a leading market
position.
. Maintain design leadership in core silicon timing technologies through
our extensive design library, patents on core technologies and
significant investments in research and development.
. Expand into new timing markets through select acquisitions of technology
and recruitment of personnel that complement our existing expertise.
Recent Developments
On April 17, 2000 we announced our financial results for the three months
ended April 1, 2000. Consolidated revenue during the quarter was $41.6 million,
a 19% increase from the corresponding quarter last year. Our core revenues
increased 34% as compared to the same period in the prior year. Sales growth
for our silicon timing products reflected an increase in market share,
particularly in the PC industry, as well as increased shipments to the
communications industry and for digital set-top box applications. Gross margin
during the quarter increased to 61% from 58% during the same quarter a year
ago, reflecting reduced material costs and a favorable product mix for the
quarter. Traditionally, this quarter is our weakest quarter, particularly for
PC-related sales.
2
<PAGE>
The Recapitalization
Through a recapitalization effected in May 1999, Bain Capital, Inc. and its
affiliates, The Bear Stearns Companies Inc. and one of its affiliates, and our
senior management team acquired securities that represented approximately 98%
of our outstanding voting power at such time. We refer to this transaction in
this prospectus as the recapitalization. Our senior management team, together
with many of our other employees, own common stock and options that together
will represent approximately 18% of our common stock on a fully diluted basis
following this offering. Such equity ownership represents a significant
economic commitment to, and participation in, our continued success.
3
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered......................... 12,500,000 shares by Integrated Circuit Systems, Inc.
</TABLE>
Common stock to be outstanding after
this offering.......................
63,492,905 shares of common stock
Use of Proceeds.......................
We intend to use the net proceeds of
this offering:
. to repurchase our outstanding senior
subordinated notes and pay
prepayment premiums thereon;
. to repay all indebtedness
outstanding under our senior credit
facility;
. to pay fees and expenses of this
offering; and
. for general corporate purposes.
Proposed Nasdaq Symbol................ ICST
The common stock to be outstanding after this offering is based on shares
outstanding as of May 1, 2000 and excludes 1,875,000 shares of common stock
that may be issued to cover over-allotments of shares, 8,786,672 shares of
common stock issuable upon exercise of outstanding stock options and
approximately 6,800,000 additional shares of common stock expected to be
reserved for future grants, awards or sale under our 2000 Long Term Equity
Incentive Plan or sale under the 2000 Employee Stock Purchase Plan. See
"Management--Management Equity Participation." The number of shares of common
stock to be outstanding after this offering assumes the conversion of our
Series A preferred stock into Class A common stock and Class L common stock and
the reclassification of our Class A common stock, Class B common stock and
Class L common stock. See "The Reclassification."
Risk Factors
Investing in our common stock involves substantial risks. See the "Risk
Factors" section of this prospectus for a description of some of the risks you
should carefully consider before investing in our common stock.
Additional Information
We were incorporated under the laws of the Commonwealth of Pennsylvania on
June 8, 1976. Our principal executive office is located at 2435 Boulevard of
the Generals, Norristown, Pennsylvania, 19403, and our telephone number is
(610) 630-5300. We maintain a website on the Internet at www.icst.com. Our
website and the information it contains shall not be deemed to be part of this
prospectus.
4
<PAGE>
Summary Historical Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma (b)
----------------------
Six Months Fiscal Year Six Months
Fiscal Year Ended (a) Ended Ended Ended
----------------------------- ---------- ----------- ----------
June 28, June 27, July 3, January 1, July 3, January 1,
1997 1998 1999 2000 1999 2000
-------- -------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Core................... $ 63,280 $ 90,622 $ 107,710 $ 69,833 $107,710 $69,833
Non-core............... 41,079 70,012 31,353 9,065 31,353 9,065
-------- -------- --------- -------- -------- -------
Total revenue........... $104,359 $160,634 $ 139,063 $ 78,898 $139,063 $78,898
======== ======== ========= ======== ======== =======
Gross margin............ 45,222 71,775 74,567 46,028 74,567 46,028
Research and
development............ 13,521 19,797 21,316 11,721 16,808 11,721
Selling, general and
administrative
(including goodwill
amortization).......... 15,654 19,678 19,794 8,642 18,478 8,142
Special charges (c)..... 11,196 -- 15,051 3,102 -- 3,102
-------- -------- --------- -------- -------- -------
Operating income........ 4,851 32,300 18,406 22,563 39,281 23,063
Interest expense (d).... 63 64 2,955 9,312 96 --
Gain on sale of assets.. -- -- (10,734) -- -- --
Interest and other
expense (income), net.. 5,984 (1,984) (2,178) (369) (2,178) (369)
-------- -------- --------- -------- -------- -------
Income (loss) from
continuing operations
before income taxes.... (1,196) 34,220 28,363 13,620 41,363 23,432
Income tax expense...... 6,314 12,845 5,320 1,403 14,814 5,328
-------- -------- --------- -------- -------- -------
Income (loss) from
continuing operations.. (7,510) 21,375 23,043 12,217 $ 26,549 $18,104
======== =======
Loss from discontinued
operations (e)......... (909) -- -- --
Gain from extraordinary
item, net of tax....... -- -- -- 170
-------- -------- --------- --------
Net income (loss)....... $ (8,419) $ 21,375 $ 23,043 $ 12,387
======== ======== ========= ========
Net Income Per Common
Share:
Basic.................. $0.48 $0.33
Diluted................ $0.43 $0.29
Weighted Average Common
Shares Outstanding:
Basic.................. 55,454 55,463
Diluted................ 61,647 63,177
Other Financial Data:
EBITDA (excluding non-
recurring charges)
(f).................... $ 19,791 $ 36,879 $ 38,422 $ 27,918 $ 43,699 $28,418
Gross margin %.......... 43.3% 44.7% 53.6% 58.3% 53.6% 58.3%
Cash provided by
operating activities... 10,397 22,345 24,450 17,103
Cash provided by (used
in) investing
activities............. (19,274) (13,490) 20,675 (1,779)
Cash used in financing
activities............. (74) (1,940) (61,180) (126)
Capital expenditures.... 3,358 8,139 7,694 2,608
Depreciation and
amortization........... 3,744 4,579 4,965 2,253
Balance Sheet Data:
Cash and cash
equivalents............ $ 18,425 $ 25,340 $ 9,285 $ 24,483
Working capital......... 48,260 65,113 26,910 39,715
Total assets............ 90,622 108,009 87,795 103,842
Total debt.............. 1,709 1,523 170,030 156,653
Stockholders' equity
(deficit).............. 70,147 89,768 (106,912) (80,899)
</TABLE>
See "Notes to Summary Historical Consolidated Financial Data" on the following
page.
Our fiscal year refers to a fiscal year ending on the Saturday closest to
June 30 of such year.
Except as otherwise noted, all references throughout this prospectus to
number of shares, per share and stock option data have been restated, giving
retroactive effect to the stock split and the reclassification.
5
<PAGE>
Notes to Summary Historical Consolidated Financial Data
(a) Our fiscal year is based upon a 52/53 week operating cycle that ends on the
Saturday nearest June 30. All of the fiscal year periods presented
represent a 52-week operating cycle, except for fiscal year 1999 which
represents 53 weeks.
(b) The pro forma statement of operations and net income per share data give
pro forma effect to (1) the stock split and the reclassification of our
three classes of common stock into a single class, (2) the portion of this
offering and the application of the net proceeds therefrom necessary to
repurchase 100% of our outstanding senior subordinated notes and to repay
our senior credit facility, (3) other pro forma adjustments as summarized
in the "Unaudited Pro Forma Consolidated Statement of Operations" shown
elsewhere in this prospectus and (4) the dilutive effect of options under
the treasury stock method using a market price of $16.00 per share as if
each had occurred as of the beginning of the periods presented.
See "Unaudited Pro Forma Consolidated Financial Data."
(c) Special charges consist of the following:
<TABLE>
<CAPTION>
Year Ended Six Months
------------------------- Ended
June 28, June 27, July 3, January 1,
1997 1998 1999 2000
-------- -------- ------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Compensation costs(1).................... -- -- $15,051 --
Write-off of in-process research and de-
velopment costs(2)...................... 11,196 -- -- --
Litigation settlement(3)................. -- -- -- 3,102
------- --- ------- ------
$11,196 -- $15,051 $3,102
======= === ======= ======
</TABLE>
- --------------------
(1) In connection with the recapitalization, we recorded a one-time
compensation charge of $15.1 million related to the accelerated
vesting, cash-out and conversion of employee stock options.
(2) We recorded a one-time charge of $11.2 million for this non-deductible
(for tax purposes) intangible write-off in connection with our
acquisition of MicroClock, Inc.
(3) In connection with the establishment of our Arizona design center, we
recorded a one-time charge of $3.1 million.
(d) On May 11, 1999, we effected the recapitalization. We issued $100.0 million
in aggregate principal amount of our senior subordinated notes in
connection with the recapitalization and entered into our $95.0 million
senior credit facility. As of April 1, 2000, $93.0 million aggregate
principal amount of our senior subordinated notes was outstanding, and
$57.6 million was outstanding under our senior credit facility.
(e) In fiscal 1995, we acquired a 51% majority interest in ARK Logic, Inc., a
developer of complex graphic accelerator chips. Subsequently, in fiscal
year 1997, we disposed of our majority interest in ARK Logic, Inc. The
disposition of ARK Logic, Inc. was accounted for as a discontinued
operation.
(f) EBITDA represents earnings from continuing operations before interest,
taxes, depreciation, amortization, other income and expense and special
charges. EBITDA is presented because we believe that it is frequently used
by security analysts in the evaluation of companies. However, EBITDA should
not be considered as an alternative to cash flow from operating activities
as a measure of liquidity, as an alternative to net income as an indicator
of our operating performance, or as an alternative to any other measures of
performance in accordance with generally accepted accounting principles.
6
<PAGE>
The following table sets forth a reconciliation of income (loss) from
continuing operations before income taxes to EBITDA (See notes to "Unaudited
Pro Forma Consolidated Statements of Operations" for additional details):
<TABLE>
<CAPTION>
Pro Forma
Year Ended As Adjusted
--------------------------- -----------------------
Six Months Year Six
Ended Ended Months Ended
June 28, June 27, July 3, January 1, July 3, January 1,
1997 1998 1999 2000 1999 2000
-------- -------- ------- ---------- ------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations,
before income taxes.... $ (1,196) $34,220 $28,363 $13,620 $41,363 $23,432
Depreciation and
amortization........... 3,744 4,579 4,965 2,253 4,418(1) 2,253
Interest expense........ 63 64 2,955 9,312 96 --
Interest and other
expense (income), net.. 5,984 (1,984) (2,178) (369) (2,178) (369)
Gain on sale of assets.. -- -- (10,734) -- -- --
Special charges......... 11,196 -- 15,051 3,102 -- 3,102
-------- ------- ------- ------- ------- -------
EBITDA.................. $ 19,791 $36,879 $38,422 $27,918 $43,699 $28,418
======== ======= ======= ======= ======= =======
</TABLE>
- --------------------
(1) Excludes savings from depreciation and amortization of $384 from the sale
of our data communications product group and $163 from the sale and lease-
back of our Norristown facility.
7
<PAGE>
RISK FACTORS
You should carefully consider the following factors in addition to the
other information set forth in this prospectus in analyzing an investment in
the common stock offered hereby. The risks and uncertainties described below
are not the only ones facing us. Additional risks and uncertainties that we do
not presently know about or that we currently believe are immaterial may also
inadvertently impact our business operations. If any of the following risks
actually occur, our business, financial condition or results of operations
will likely suffer. In such case, the trading price of our common stock could
fall, and you may lose all or part of the money you paid to buy our common
stock. This prospectus contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below, as well as those discussed
elsewhere in this prospectus.
Fluctuation of Operating Results--Our future operating results are likely to
fluctuate and therefore may fail to meet expectations which could cause our
stock price to decline.
Our operating results have varied widely in the past and are likely to do
so in the future. In addition, our operating results may not follow any past
trends. Our future operating results will depend on many factors and may fail
to meet our expectations for a number of reasons, including those set forth in
these risk factors. Any failure to meet expectations could cause our stock
price to significantly fluctuate or decline.
Factors that could cause our operating results to fluctuate that relate to
our internal operations include:
. the need for continual, rapid new product introductions;
. changes in our product mix; and
. our inability to adjust our fixed costs in the face of any declines in
sales.
Factors that could cause our operating results to fluctuate that depend on
our suppliers and customers include:
. the timing of significant product orders, order cancellations and
reschedulings;
. the availability of production capacity and fluctuations in the
manufacturing yields at third parties' facilities that manufacture our
devices; and
. the cost of raw materials and manufacturing services from our suppliers.
Factors that could cause our operating results to fluctuate that are
industry risks include:
. the cyclical nature of the semiconductor, communications, and consumer
and business electronics industries; and
. intense competitive pricing pressures.
Cyclical Industry--Downturns in the business cycle could reduce the revenues
and profitability of our business.
The semiconductor, communications, and consumer and business electronics
industries are highly cyclical. In 1998, the semiconductor industry
experienced a downturn. Our markets may experience other, possibly more severe
and prolonged, downturns in the future. We may also experience significant
changes in our operating profit margins as a result of variations in sales,
changes in product mix, price competition for orders and costs associated with
the introduction of new products.
8
<PAGE>
The markets for our products depend on continued demand for communications
applications and consumer and business electronics. There can be no assurance
that these end-user markets will not experience changes in demand that will
adversely affect our business.
We Depend on Continuous Introduction of New Products Based on the Latest
Technology--Our inability to create new products could adversely affect our
business.
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
Product life cycles are continually becoming shorter, which may cause the gross
margins of semiconductor products to decline as the next generation of
competitive products is introduced. Therefore, our future success is highly
dependent upon our ability to continually develop new products using the latest
and most cost-effective technologies, introduce them in commercial quantities
to the marketplace ahead of the competition and have them selected for
inclusion in products of leading systems manufacturers. We cannot assure you
that we will be able to regularly develop and introduce such new products on a
timely basis or that our products, including recently introduced products, will
be selected by systems manufacturers for incorporation into their products. Our
failure to develop such new products, to have our products available in
commercial quantities ahead of competitive products or to have them selected
for inclusion in products of systems manufacturers would have a material
adverse effect on our results of operations and financial condition.
The market for communications applications is characterized by rapidly
changing technology and continuing process development. Our future success in
the communications applications market depends in part on our ability to design
and produce products that meet the changing needs of customers in this market.
We can not assure you that we will be able to regularly develop and introduce
products that will be selected by communications applications manufacturers for
incorporation into their products.
Competition--Our business is very competitive and increased competition could
adversely affect us.
The semiconductor and PC component industries are intensely competitive. Our
ability to compete depends heavily upon elements outside our control, such as
general economic conditions affecting the semiconductor and PC industries and
the introduction of new products and technologies by competitors. Many of our
competitors and potential competitors have significant financial, technical,
manufacturing and marketing resources. These competitors include major
multinational corporations possessing worldwide wafer fabrication and
integrated circuit production facilities and diverse, established product
lines. Competitors also include emerging companies attempting to obtain a share
of the existing market for our current and proposed products. To the extent
that our products achieve market acceptance, competitors typically seek to
offer competitive products or embark on pricing strategies which, if
successful, could have a material adverse effect on our results of operation
and financial condition.
We Depend on the PC Industry--Our business could be adversely affected by
decline in the PC market.
A substantial portion of the sales of our products depends largely on sales
of PCs and peripherals for PCs. The PC industry is subject to price
competition, rapid technological change, evolving standards, short product life
cycles and continuous erosion of average selling prices. Should the PC market
decline or experience slower growth, then a decline in the order rate for our
products could occur. A downturn in the PC market could also affect the
financial health of some of our customers, which could affect our ability to
collect outstanding accounts receivable from such customers.
We Depend on Outside Wafer Foundries and Assemblers--Our inability to obtain
wafers and assemblers could seriously affect our operations.
We currently depend entirely upon third-party suppliers for the manufacture
of the silicon wafers from which our finished integrated circuits are
manufactured and for the packaging of finished integrated circuits from silicon
wafers.
9
<PAGE>
We cannot assure you that we will be able to obtain adequate quantities of
processed silicon wafers within a reasonable period of time or at commercially
reasonable rates. In the past, the semiconductor industry has experienced
disruptions from time to time in the supply of processed silicon wafers due to
quality or yield problems or capacity limitations. Virtually all of our wafers
are manufactured by three outside foundries. If one or more of these foundries
is unable or unwilling to produce adequate supplies of processed wafers on a
timely basis, it could cause significant delays and expense in locating a new
foundry and redesigning circuits to be compatible with the new manufacturer's
processes and, consequently, could have a material adverse effect on our
results of operations and financial condition.
We also rely entirely upon third parties for the assembly of our finished
integrated circuits from processed silicon wafers. We currently rely on four
assemblers, two of which produce most of our finished integrated circuits.
While we believe that there is typically a greater availability of assemblers
than silicon wafer foundries, we could nonetheless incur significant delays and
expense if one or more of the assemblers upon which we currently rely are
unable or unwilling to assemble finished integrated circuits from silicon
wafers.
International Business Activities--Our business could be adversely affected by
changes in political and economic conditions abroad.
For the fiscal years 1997, 1998 and 1999, we generated approximately 60.3%,
58.8% and 68.8% of our revenue, respectively, from international markets. These
sales were generated primarily from customers in the Pacific Rim region and
included sales to foreign corporations, as well as to foreign subsidiaries of
U.S. corporations. We estimate that in fiscal year 1999, approximately one-half
of our sales in international markets were to foreign subsidiaries of U.S.
corporations, with the bulk of them being in Taiwan. In addition, certain of
our international sales are to customers in the Pacific Rim region, who in turn
sell some of their products to North America, Europe and other non-Asian
markets.
In addition, two of our wafer suppliers and all of our assemblers are
located in the Pacific Rim region. There can be no assurance that the effect of
an economic crisis on our suppliers will not impact our wafer supply or
assembly operations, or that the effect on our customers in that region will
not adversely affect both the demand for our products and the collectibility of
our receivables.
Our international business activities in general are subject to a variety of
potential risks resulting from certain political, economic and other
uncertainties including, without limitation, political risks relating to a
substantial number of our customers being in Taiwan. Certain aspects of our
operations are subject to governmental regulations in the countries in which we
do business, including those relating to currency conversion and repatriation,
taxation of our earnings and earnings of our personnel, and our use of local
employees and suppliers. Our operations are also subject to the risk of changes
in laws and policies in the various jurisdictions in which we do business,
which may impose restrictions on us. We cannot determine to what extent our
future operations and earnings may be affected by new laws, new regulations,
changes in or new interpretations of existing laws or regulations or other
consequences of doing business outside the U.S.
Our activities outside the U.S. are subject to additional risks associated
with fluctuating currency values and exchange rates, hard currency shortages
and controls on currency exchange. Additionally, worldwide semiconductor
pricing is influenced by currency fluctuations and the devaluation of foreign
currencies could have a significant impact on the prices of our products if our
competitors offer products at significantly lower prices in an effort to
maximize cash flows to finance short-term, dollar denominated obligations; such
devaluation could also impact the competitive position of our customers in
Taiwan and elsewhere, which could impact our sales. Currently, we do not engage
in currency hedging activities as all transactions are denominated in U.S.
dollars.
10
<PAGE>
Risks Related to Future Acquisitions--We may make acquisitions which could
subject us to a number of operational risks.
In order to grow our business and maintain our competitive position, we may
acquire other businesses in the future. We cannot predict whether or when any
acquisitions will occur. Acquisitions commonly involve certain risks, and we
cannot assure you that we will make any acquisitions or that any acquired
business will be successfully integrated into our operations or will perform as
we expect. Any future acquisitions could involve certain other risks, including
the assumption of additional liabilities, potentially dilutive issuances of
equity securities and diversion of management's attention from other business
concerns. Futhermore, we may issue equity securities or incur debt to pay for
any future acquisitions. If we issue equity securities, your percentage
ownership of our company would be reduced. We may also enter into joint venture
transactions. Joint ventures have the added risk that the other joint venture
partners may have economic, business or legal interests or objectives that are
inconsistent with our interests and objectives. We may also have to fulfill our
joint venture partners' economic or other obligations if they fail to do so.
We Depend on Patents, Trade Secrets and Proprietary Technology--Our inability
to secure our intellectual property could adversely affect our business.
We hold several patents as well as copyrights, mask works and trademarks
with respect to various products and expect to continue to file applications
for them in the future as a means of protecting our technology and market
position. In addition, we seek to protect our proprietary information and know-
how through the use of trade secrets, confidentiality agreements and other
similar security measures. With respect to patents, there can be no assurance
that any applications for patent protection will be granted, or, if granted,
will offer meaningful protection. Additionally, there can be no assurance that
competitors will not develop, patent or gain access to similar know-how and
technology, or reverse engineer our products, or that any confidentiality
agreements upon which we rely to protect our trade secrets and other
proprietary information will be adequate to protect our proprietary technology.
The occurrence of any such events could have a material adverse effect on our
results of operations and financial condition.
Patents covering a variety of semiconductor designs and processes are held
by various companies. We have from time to time received, and may in the future
receive, communications from third parties claiming that we may be infringing
certain of such parties' patents and other intellectual property rights. Any
infringement claim or other litigation against or by us could have a material
adverse effect on our results of operations and financial condition.
Virtually all of our key engineers worked at other companies or at
universities and research institutions before joining us. Disputes may arise as
to whether technology developed by such engineers was first discovered when
they were employed by or associated with other institutions in a manner that
would give third parties rights to such technology superior to our rights, if
any. Disputes of this nature have occurred in the past, and are expected to
continue to arise in the future, and there can be no assurance that we will
prevail in these disputes. To the extent that consultants, vendors or other
third parties apply technological information independently developed by them
or by others to our proposed products, disputes may also arise as to the
proprietary rights to such information, which may not be resolved in our favor.
We Depend upon Key Management--Our loss of certain key members of management
could negatively impact our business prospects.
We are dependent upon our ability to attract and retain highly-skilled
technical and managerial personnel. We believe that our future success in
developing marketable products and achieving a competitive position will depend
in large part upon whether we can attract and retain skilled personnel.
Competition for such personnel is intense, and there can be no assurance that
we will be successful in attracting and retaining the personnel we require to
successfully develop new and enhanced products and to continue to grow and
operate profitably.
11
<PAGE>
Furthermore, retention of scientific and engineering personnel in our industry
typically requires us to present attractive compensation packages, including
stock option grants.
Product Liability Exposure and Potential Unavailability of Insurance--Some of
our products may be subject to product liability claims.
Certain of our custom integrated circuits products are sold into medical
markets for applications which include blood glucose measurement devices and
hearing aids. In certain cases, we have provided or received indemnities with
respect to possible third-party claims arising from these products. Although we
believe that exposure to third-party claims has been minimized, there can be no
assurance that we will not be subject to third-party claims in these or other
applications or that any indemnification or insurance available to us will be
adequate to protect us from liability. A product liability claim, product
recall or other claim, as well as any claims for uninsured liabilities or in
excess of insured liabilities, could have a material adverse effect on our
results of operations and financial condition.
We expect to use a significant portion of the net proceeds of this offering to
repay indebtedness and, as a result, we may be unable to meet our future
capital and liquidity requirements.
We expect to use a significant portion of the net proceeds of this offering
to repay indebtedness. As a result, a limited amount of the net proceeds will
be available to fund future operations. We expect that our principal sources of
funds following this offering will be cash generated from operating activities
and, if necessary, borrowings under our new revolving credit facility. We
believe that these funds will provide us with sufficient liquidity and capital
resources for us to meet our current and future financial obligations, as well
as to provide funds for our working capital, capital expenditures and other
needs for the foreseeable future. No assurance can be given, however, that this
will be the case. We may require additional equity or debt financing to meet
our working capital requirements or to fund our research and development
efforts. There can be no assurance that additional financing will be available
when required or, if available, will be on terms satisfactory to us.
We cannot assure you of the price at which we will be required to repurchase a
portion of our outstanding senior subordinated notes.
We intend to use a significant portion of the net proceeds of this offering
to repurchase all of our outstanding senior subordinated notes. We have
commenced a tender offer to repurchase all of our outstanding senior
subordinated notes at a price equal to 117.50% (estimated as of April 26, 2000)
of the principal amount thereof. The tender offer is subject to conditions,
including the completion of this offering and the valid tender of at least 90%
of the outstanding principal amount of our senior subordinated notes. We cannot
assure you that any or all of the senior subordinated notes will be purchased
pursuant to the tender offer. If we do not complete the tender offer, we expect
to redeem up to $28.0 million of the $93.0 million aggregate principal amount
of our outstanding senior subordinated notes at a price equal to 111.50% of the
principal amount redeemed plus accrued and unpaid interest thereon and purchase
the remaining senior subordinated notes through open market purchases,
privately negotiated transactions, one or more tender offers or exchange offers
or otherwise. We currently do not have a contractual right to redeem the
remaining $65.0 million aggregate outstanding principal amount of the senior
subordinated notes. We cannot assure you of the price at which we will be
required to repurchase our senior subordinated notes if we do not complete the
tender offer.
Investment funds affiliated with Bain Capital will continue to have significant
influence over our business after this offering, and could delay, deter or
prevent a change of control or other business combination.
Upon completion of this offering, investment funds affiliated with Bain
Capital will hold in the aggregate approximately 42.3% of our outstanding
common stock. If the underwriters' over-allotment is exercised in full, these
funds will hold approximately 39.5% of our outstanding common stock. In
addition, one of the directors that will serve on our board following this
offering will be a representative of Bain Capital. By virtue of such stock
ownership, these investment funds will continue to have a significant influence
over all matters submitted to our shareholders, including the election of our
directors, and will continue to exercise significant control over our business,
policies and affairs. Such concentration of voting power could have the effect
of delaying,
12
<PAGE>
deterring or preventing a change of control of our company or other business
combination that might otherwise be beneficial to shareholders.
Provisions of our charter documents and Pennsylvania law could discourage
potential acquisition proposals and could delay, deter or prevent a change in
control.
Provisions of our articles of incorporation and by-laws may inhibit changes
in control of our company not approved by our board of directors and would
limit the circumstances in which a premium may be paid for the common stock in
proposed transactions, or a proxy contest for control of the board may be
initiated. These provisions provide for:
. the authority of our board of directors to issue, without shareholder
approval, preferred stock with such terms as our board of directors
determines;
. classified board of directors;
. a prohibition on shareholder action through written consents;
. a requirement that special meetings of shareholders be called only by
our chief executive officer or board of directors; and
. advance notice requirements for shareholder proposals and nominations.
Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of
1988 prohibits certain transactions with a 20% shareholder, an "interested
shareholder," for a period of five years after the date any shareholder becomes
an interested shareholder unless the interested shareholder's acquisition of
20% or more of the common stock is approved by our board of directors. This
provision may discourage potential acquisition proposals and limit the
circumstances in which a premium may be paid for our company.
You will experience an immediate and significant dilution in the book value of
your investment.
Because the initial public offering price is substantially higher than the
book value per share of common stock, purchasers of the common stock in this
offering will be subject to immediate and substantial dilution of $14.74 per
share, assuming we price our common stock at the midpoint of the range set
forth on the cover of this prospectus. In addition, the total amount of our
capital will be less than what it would have been had you and all of our
existing shareholders and option holders paid the same amount per share as you
will pay in this offering. See "Dilution."
Future sales by our existing shareholders could adversely affect the market
price of our common stock.
Future sales of the shares of common stock held by existing shareholders
could have a material adverse effect on the market price of our common stock.
Upon completion of this offering, we expect that:
. 12,500,000 shares of common stock, or 14,375,000 shares if the
underwriters' over-allotment option is exercised in full, sold in this
offering will be freely tradeable without restriction under the
Securities Act, except any such shares which may be acquired by an
"affiliate" of our company; and
. 50,992,905 shares of common stock held by our existing shareholders will
be eligible for sale into the public market, subject to compliance with
the resale volume limitations and other restrictions of Rule 144 under
the Securities Act, beginning 180 days after the date of this
prospectus.
Beginning 180 days after the completion of this offering, the holders of an
aggregate of approximately 50,992,905 shares of common stock will have limited
rights to require us to register their shares of common stock under the
Securities Act at our expense.
There may not be an active market for our common stock, making it difficult to
sell the stock you purchase.
Prior to this offering, there has been no public market for our common
stock. We cannot assure you that an active trading market for our common stock
will develop or be sustained after the offering. The initial public offering
price for our common stock will be determined by negotiations between the
underwriters and us. We
13
<PAGE>
cannot assure you that the initial public offering price will correspond to the
price at which our common stock will trade in the public market subsequent to
the offering or that the price of our common stock available in the public
market will reflect our actual financial performance.
Our stock price could be volatile and could drop unexpectedly following this
offering.
Historically, stock prices and trading volumes for newly public companies
fluctuate widely for a number of reasons, including some reasons that may be
unrelated to their businesses or results of operations. This type of market
volatility could depress the price of our common stock without regard to our
operating performance. In addition, our operating results may be below the
expectations of public market analysts or investors. If this were to occur, the
market price of our common stock could decrease, perhaps significantly.
The forward-looking statements contained in this prospectus are based on our
predictions of future performance. As a result, you should not place undue
reliance on these forward-looking statements.
This prospectus contains forward-looking statements, including, without
limitation, statements concerning the conditions in the semiconductor and
semiconductor capital equipment industries, our operations, economic
performance and financial condition, including in particular statements
relating to our business and growth strategy and product development efforts.
The words "believe," "expect," "anticipate," "intend" and other similar
expressions generally identify forward-looking statements. Potential investors
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties, including, without limitation, those identified under this "Risk
Factors" section and elsewhere in this prospectus and other risks and
uncertainties indicated from time to time in our filings with the SEC. Actual
results could differ materially from these forward-looking statements. In
addition, important factors to consider in evaluating such forward-looking
statements include changes in external market factors, changes in our business
or growth strategy or an inability to execute our strategy due to changes in
our industry or the economy generally, the emergence of new or growing
competitors and various other competitive factors. In light of these risks and
uncertainties, there can be no assurance that the matters referred to in the
forward-looking statements contained in this prospectus will in fact occur.
We do not undertake to update our forward-looking statements or risk factors
to reflect future events or circumstances.
14
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of 12,500,000 shares of
common stock in this offering will be approximately $179.6 million, assuming
an initial public offering price of $16.00 per share, the midpoint of the
range set forth on the cover of this prospectus. We intend to use a
significant portion of our net proceeds to repurchase our outstanding senior
subordinated notes, to pay the prepayment premiums and accrued and unpaid
interest thereon, to repay in full all outstanding obligations under our
senior credit facility and to pay fees and expenses of this offering. We will
use any remaining net proceeds, if any, for general corporate purposes,
including working capital. Pending such uses, we will invest such proceeds in
short-term, interest-bearing, investment-grade securities.
Our senior subordinated notes due 2009 in the aggregate outstanding
principal amount of $93.0 million bear interest at the rate of 11 1/2% per
annum. We have commenced a tender offer to repurchase the aggregate
outstanding principal amount of our senior subordinated notes at a price equal
to 117.50% (estimated as of April 26, 2000) of the principal amount thereof.
The tender offer is subject to conditions, including the completion of this
offering and the valid tender of at least 90% of the outstanding principal
amount of our senior subordinated notes. If we do not complete the tender
offer, we expect to use the net proceeds from this offering to make an offer
to redeem up to $28.0 million of the aggregate outstanding principal amount of
the senior subordinated notes at a price equal to 111.50% of the principal
amount thereof plus accrued and unpaid interest thereon and purchase the
remaining senior subordinated notes through open market purchases, privately
negotiated transactions, one or more tender offers or exchange offers or
otherwise. Approximately 8% of the senior subordinated notes are held by
investment funds advised by Sankaty Advisors, Inc., an affiliate of Bain
Capital.
Our senior credit facility provides for two groups of term loans: term A
loans for $30.0 million and term B loans for $40.0 million. The senior credit
facility also provides for revolving loans for up to $25.0 million, including
letters of credit. As of April 1, 2000, we owed $57.6 million under our senior
credit facility. The different loans under the senior credit facility are due
as follows:
. the revolving loans--May 11, 2004;
. the term A loans--2.0% in 2000, 14.0% in 2001, 20.0% in 2002, 28.0% in
2003 and 36.0% in 2004; and
. the term B loans--1.0% in each of 2000, 2001, 2002, 2003 and 2004, 40.0%
in 2005 and 55.0% in 2006.
As of April 1, 2000, the interest rates for outstanding indebtedness under
our senior credit facility were:
. the term A loans--8.4%; and
. the term B loans--9.8%.
We will use some of the net proceeds of this offering to repay all
outstanding indebtedness under our senior credit facility. We will then
terminate the senior credit facility, and after this offering, we intend to
enter into a new revolving credit facility to meet our working capital and
general corporate needs. Approximately 12% of the indebtedness outstanding
under our senior credit facility is owed to an investment fund advised by
Sankaty Advisors, Inc., an affiliate of Bain Capital. Approximately 15% of the
indebtedness outstanding under our senior credit facility is owed to Credit
Suisse First Boston, an affiliate of Credit Suisse First Boston Corporation,
one of our underwriters. See "Certain Relationship and Related Transactions."
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<PAGE>
THE RECLASSIFICATION
Prior to this offering, we had three classes of common stock, designated as
Class A common stock, Class B common stock and Class L common stock. The Class
A common stock and Class B common stock were identical, except that the Class B
common stock was non-voting and was convertible on a share-for-share basis into
Class A common stock at any time so long as, after giving effect to the
conversion, the converting Class B common shareholders and their affiliates did
not own more than 49.9% of the outstanding shares of Class A common stock. The
Class A common stock was also convertible at any time on a share-for-share
basis into Class B common stock. The Class L common stock was identical to the
Class A common stock and the Class B common stock, except that (1) each share
of Class L common stock was entitled to a preferential payment upon any
distribution by us to holders of Class A common stock and Class B common stock,
whether by dividend, liquidating distribution or otherwise, equal to the
original cost of such share ($18.00) plus an amount which accrued on a daily
basis at a rate of 9.0% per annum, compounded on a calendar quarter, and (2)
the Class L common stock and the Class B common stock were non-voting. This
preferential amount is referred to herein as the "Preference Amount." On May
22, 2000, the estimated effective date of this offering, the Preference Amount
will be $19.72 per share of Class L common stock issued at the time of the
recapitalization.
We also had one class of preferred stock, designated Series A preferred
stock. The Series A preferred stock had a liquidation preference of $4.00 per
share, plus all accrued and unpaid dividends thereon at a rate of 7.5% per
annum, and each share was convertible at any time into 0.9 share of Class A
common stock and 0.1 share of Class L common stock.
Prior to the effectiveness of the registration statement of which this
prospectus is a part our articles of incorporation will be amended to provide
that:
. each share of our Series A preferred stock will be converted into shares
of Class A common stock and Class L common stock, as described above;
. each share of outstanding Class A common stock and Class B common stock
will be reclassified into a single class of common stock on a share-for-
share basis; and
. each share of outstanding Class L common stock will be reclassified into
one share of common stock plus an additional number of shares of common
stock determined by dividing the Preference Amount by the value of a
share of common stock based on the initial public offering price.
The foregoing is referred to in this prospectus as the "reclassification."
None of these newly converted shares will be sold at the time of the offering
unless the underwriters exercise their option to purchase up to 1,875,000
shares of common stock to cover over-allotments.
Assuming an initial public offering price of $16.00 per share, the midpoint
of the range set forth on the cover page of this prospectus, a Preference
Amount of $19.72 per share on Class L common stock, and an effective date of
May 22, 2000 for this offering, an aggregate of 4,636,791 shares of common
stock will be issued in exchange for the outstanding shares of Class L common
stock in connection with the reclassification (prior to the stock-split). The
actual number of shares of common stock that will be issued as a result of the
reclassification is subject to change based on the actual offering price and
the effectiveness of the registration statement of which this prospectus forms
a part. Fractional shares otherwise issuable as a result of the
reclassification will be rounded to the nearest whole number. See "Description
of Capital Stock."
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CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of our company as of January 1, 2000, on an actual basis and on
an adjusted basis to reflect: (1) the reclassification and a 1.6942-for-1 stock
split and (2) the sale by us of 12,500,000 shares of common stock pursuant to
this offering and the application of the net proceeds therefrom as described in
Note 1 below, assuming an offering price of $16.00 per share, the midpoint of
the range set forth on the cover of this prospectus. This table should be read
in conjunction with the "Selected Historical Financial Data" included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
January 1, 2000
--------------------
Actual As Adjusted
------- -----------
(in millions)
<S> <C> <C>
Cash and cash equivalents................................. $ 24.5 $ 30.5
======= ======
Long-term obligations (including current portion):
Senior credit facility(1)............................... $ 63.6 --
Senior subordinated notes(1)............................ 93.0 --
Other long-term obligations............................. -- --
------- ------
Total long-term obligations........................... 156.6 --
Stockholders' equity (deficit):
Common stock, $0.01 par value, no shares authorized or
issued on an actual basis and 63,492,905 shares issued
and outstanding on an as adjusted basis................ -- 0.6
Series A preferred stock, $4.00 par value, 3,367,000
shares authorized, issued and outstanding and no shares
authorized, issued and outstanding on an as adjusted
basis.................................................. 13.5 --
Class A common stock, $0.01 par value, 52,520,000 shares
authorized; 27,969,481 shares issued and outstanding on
an actual basis and no shares authorized, issued and
outstanding on an as adjusted basis.................... 0.3 --
Class B common stock, $0.01 par value, 52,520,000 shares
authorized; 9,577,446 shares issued and outstanding on
an actual basis and no shares authorized, issued and
outstanding on an as adjusted basis.................... 0.1 --
Class L common stock, $0.01 par value, 6,777,000 shares
authorized; 4,003,144 shares issued and outstanding on
an actual basis and no shares authorized, issued and
outstanding on an as adjusted basis.................... 0.0 --
Additional paid-in capital.............................. 34.6 227.5
Accumulated deficit(2).................................. (129.0) (146.5)
Other................................................... (0.4) (0.4)
------- ------
Total stockholders' equity (deficit).................. (80.9) 81.2
------- ------
Total capitalization.................................. $ 75.7 $ 81.2
======= ======
</TABLE>
- ---------------------
(1) The "As Adjusted" amounts assume a portion of the net proceeds are used to
(a) repurchase the outstanding aggregate principal amount of our senior
subordinated notes at an assumed price of approximately 117.50% (as of
April 26, 2000) (plus accrued and unpaid interest thereon) through a tender
offer that we have recently commenced; and (b) repay all of the outstanding
obligations under our senior credit facility. We currently do not have a
contractual right to redeem $65.0 million of the aggregate outstanding
principal amount of the senior subordinated notes. A 1.0% increase or
decrease in the price required to repurchase the senior subordinated notes
would change "As Adjusted Total Capitalization" by $0.9 million.
(2) The "As Adjusted" accumulated deficit balance at January 1, 2000 includes
an extraordinary charge of $17.5 million (net of tax) relating to (a) a
prepayment penalty, totaling $10.2 million (net of tax), associated with
the repurchase of the aggregate outstanding principal amount of our senior
subordinated notes and (b) the elimination of the deferred financing costs,
totaling $7.3 million (net of tax) associated with the repayment of our
senior subordinated notes and the retirement of our senior credit facility.
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DIVIDEND POLICY
We have not in the past paid, and do not expect for the foreseeable future
to pay, dividends on our common stock. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for working capital and other
general corporate purposes. The payment of dividends by us to holders of our
common stock is prohibited by our senior credit facility and is restricted by
our indenture relating to the senior subordinated notes. After this offering,
we will enter into a new revolving credit facility that may restrict our
ability to pay dividends. Any future determination to pay dividends will be at
the discretion of our board of directors and will depend upon, among other
factors, our results of operations, financial condition, capital requirements
and contractual restrictions.
DILUTION
Our pro forma net tangible book value, as of January 1, 2000, was $(94.0)
million, or $(1.84) per share of common stock. Pro forma net tangible book
value per share is determined by dividing our tangible net capital by the
aggregate number of shares of common stock outstanding, assuming the
reclassification had taken place on January 1. For purposes of the foregoing,
we calculated our net capital by subtracting our intangible assets and total
liabilities from our total assets. After giving effect to (1) the sale of the
shares of common stock offered hereby, at an assumed offering price of $16.00
per share, the midpoint of the range set forth on the cover of this prospectus,
(2) the receipt and application of the net proceeds therefrom as described in
"Use of Proceeds," and (3) the net change in our diluted outstanding common
stock between January 1, 2000 and May 1, 2000, pro forma net tangible book
value as of January 1, 2000 would have been approximately $80.2 million, or
$1.26 per share. This represents an immediate increase in pro forma net
tangible book value of $3.10 per share to the current shareholders and an
immediate dilution in pro forma net tangible book value of $14.74 per share to
purchasers of common stock in the offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $16.00
Pro forma net tangible book value per share at January 1,
2000......................................................... $(1.84)
Increase per share attributable to new investors.............. 3.10
------
Pro forma net tangible book value per share after this
offering....................................................... 1.26
------
Net tangible book value dilution per share to new investors(1).. $14.74
======
</TABLE>
- ---------------------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the offering price per share.
The following table summarizes, on a pro forma basis, as of May 1, 2000, the
number of shares purchased, the total consideration paid (or to be paid) and
the average price per share paid (or to be paid) by the existing shareholders
and the purchasers of common stock in the offering, at an assumed offering
price of $16.00 per share, the midpoint of the range set forth on the cover of
this prospectus, before deducting the estimated offering expenses and
underwriting discounts and commissions:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ---------------------
Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------- ------- -------------
(in millions)
<S> <C> <C> <C> <C> <C>
Existing shareholders... 50,992,905 80.3% $ 63.3 24.0% $ 0.81
New investors........... 12,500,000 19.7 200.0 76.0 $16.00
---------- ----- ------ -----
Total................. 63,492,905 100.0% $263.3 100.0%
========== ===== ====== =====
</TABLE>
On a pro forma basis, as of May 1, 2000, there were an aggregate of: (1)
8,786,672 shares of common stock issuable upon the exercise of outstanding
options granted under our stock plans, of which 373,965 were then exercisable
at an exercise price of $2.12 per share; and (2) approximately 6,800,000
additional shares of common stock expected to be reserved for grants, awards or
sale under our 2000 Long-Term Equity Incentive Plan or sale under our 2000
Employee Stock Purchase Plan.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The unaudited pro forma consolidated statement of operations for the year
ended July 3, 1999 and the six months ended January 1, 2000 give effect to (1)
the stock split and the reclassification and (2) the consummation of this
offering and the application of the net proceeds therefrom, as described under
"Use of Proceeds" and (3) the adjustments described in the accompanying notes
as if each had occurred on June 28, 1998.
The unaudited pro forma consolidated balance sheet as of January 1, 2000
gives pro forma effect to (1) the stock split and the reclassification, (2) the
consummation of this offering and the application of the net proceeds therefrom
as described in this prospectus and (3) the adjustments described in the
accompanying notes.
The unaudited pro forma consolidated financial data are provided for
informational purposes only and are not necessarily indicative of the results
of our operations or financial position had the transactions assumed therein
occurred, nor are they necessarily indicative of the results of operations
which may be expected to occur in the future. Furthermore, the unaudited pro
forma consolidated financial data are based upon assumptions that we believe
are reasonable and should be read in conjunction with the consolidated
financial statements and the accompanying notes thereto included elsewhere in
this prospectus.
The unaudited pro forma consolidated statements of operations do not reflect
extraordinary losses on the early extinguishments of debt resulting from the
write-off of debt issuance costs and the incurrence of prepayment penalties
(including accrued interest and related fees and expenses) in connection with
the prepayment of debt upon completion of the offering estimated at $12.2
million and $17.0 million, respectively. The unaudited pro forma consolidated
balance sheet, however, does reflect such charges and the related tax benefits
of $4.9 million and $6.8 million, respectively.
19
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended January 1, 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenue...................................... $78,898 $78,898
Cost of sales................................ 32,870 32,870
------- -------
Gross margin............................... 46,028 46,028
Expenses:
Research and development................... 11,721 11,721
Selling, general and administrative........ 11,244 11,244
Management fee............................. 500 (500)(a) --
------- ------ -------
Operating income......................... 22,563 500 23,063
Interest expense............................. 9,312 (9,312)(b) --
Interest and other income.................... (369) (369)
------- ------ -------
Pretax income from continuing operations
and before extraordinary items............ 13,620 9,812 23,432
Income tax expense....................... 1,403 3,925 (g) 5,328
------- ------ -------
Income from continuing operations before
extraordinary items......................... $12,217 $5,887 $18,104
======= ====== =======
Net income per common share (h):
Basic...................................... $ 0.33
=======
Diluted.................................... $ 0.29
=======
Weighted average common shares outstanding:
Basic...................................... 55,463
=======
Diluted.................................... 63,177
=======
</TABLE>
See "Notes to Unaudited Pro Forma Consolidated Statement of Operations."
20
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For Fiscal Year Ended July 3, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenue.................................... $139,063 $139,063
Cost of sales.............................. 64,496 64,496
-------- --------
Gross margin............................. 74,567 74,567
Expenses:
Research and development................. 21,316 (4,508)(c) 16,808
Selling, general and administrative...... 19,794 (413)(d) 18,478
(903)(e)
Compensation costs....................... 15,051 (15,051)(f) --
-------- ------- --------
Operating income....................... 18,406 20,875 39,281
Interest expense........................... 2,955 (2,859)(b) 96
Interest and other income.................. (2,178) (2,178)
(Gain) on sale of assets................... (10,734) 10,734(c) --
-------- ------- --------
Income before income taxes from
continuing operations................... 28,363 13,000 41,363
Income tax expense..................... 5,320 9,494(g) 14,814
-------- ------- --------
Income from continuing operations before
extraordinary items....................... $ 23,043 $ 3,506 $ 26,549
======== ======= ========
Net income per common share(h):
Basic.................................... $ 0.48
========
Diluted.................................. $ 0.43
========
Weighted average common shares outstanding:
Basic.................................... 55,454
========
Diluted.................................. 61,647
========
</TABLE>
See "Notes to Unaudited Pro Forma Consolidated Statement of Operations" on the
following page.
21
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(a) Reflects elimination of management fees incurred in connection with our
management agreements with each of Bain Capital and Bear Stearns which will
be terminated in connection with this offering by mutual consent of the
parties. We will pay an aggregate fee of $2.7 million to terminate these
agreements. Such termination fees have not been reflected in our pro forma
consolidated statement of operations.
(b) Reflects the decrease in interest expense in connection with the use of net
proceeds from the offering to repurchase our senior subordinated notes and
repay our senior credit facility.
(c) On February 18, 1999, we sold certain intellectual property and equipment
of our non-core data communications product group to 3Com Corporation for
approximately $16.0 million in cash, resulting in a $10.7 million non-
taxable gain. Because we retain the right to sell certain of our existing
and next generation transceiver products, no adjustments have been made to
eliminate the historical revenue of non-core data communications product
group, which was approximately $5.1 million in the six months ended January
1, 2000 and $15.2 million in fiscal 1999.
The adjustment reflects the impact on income from operations resulting from
the sale of the assets of our non-core data communications product group,
as summarized in the table below:
<TABLE>
<S> <C>
Research and development costs, net.................................. $4,244
Sublease rental income............................................... 264
------
Impact on income from operations..................................... $4,508
======
</TABLE>
(d) On April 13, 1999, we sold our corporate headquarters located in
Norristown, PA. Concurrent with the sale, we entered into an operating
lease arrangement for the property with the buyer.
The adjustment reflects the impact on income from operations resulting from
the sale and leaseback of the facility, as summarized in the table below:
<TABLE>
<S> <C>
Operating lease payments............................................. $(576)
Building depreciation................................................ 163
-----
Impact on income from operations..................................... $(413)
=====
</TABLE>
(e) The pro forma adjustment represents non-recurring investment banking, legal
and other fees incurred in connection with the recapitalization and proxy
contest relating to our February 1, 1999 shareholder meeting.
(f) In fiscal 1999, we recorded a $15.1 million charge related to the
accelerated vesting, cash-out and conversion of employee stock options that
occurred upon the consummation of the recapitalization.
(g) Represents the income tax adjustments required to result in a pro forma
income tax provision based on: (i) our historical tax provision using
historical tax amounts and (ii) the direct tax effect of the pro forma
adjustments described above at an estimated 40% effective tax rate.
(h) Pro forma net income per share and weighted average shares outstanding have
been adjusted to reflect the reclassification of all classes of common
stock into one class of common stock and reflects the 1.6942-to-1 stock-
split that will occur as of the pricing date of this offering. In addition,
shares being sold in this offering have been included in weighted average
shares outstanding because the proceeds will be used to repay outstanding
indebtedness.
22
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
January 1, 2000
(in thousands)
<TABLE>
<CAPTION>
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............. $ 24,483 $ 179,600 (a) $ 30,460
(156,623)(a)
(17,000)(b)
Marketable securities................. 284 284
Accounts receivable, net.............. 18,397 18,397
Inventories, net...................... 8,396 8,396
Prepaid expenses and other current
assets............................... 7,053 7,053
Prepaid income taxes.................. -- 7,141 (e) 7,141
Deferred income taxes................. 8,695 8,695
--------- --------- ---------
Total current assets................ 67,308 13,118 80,426
--------- --------- ---------
Property and equipment, net ............ 12,534 12,534
Deposits on purchase contracts.......... 10,578 10,578
Debt issue costs, net................... 12,173 (12,173)(c) --
Other assets............................ 1,249 1,249
--------- --------- ---------
$ 103,842 $ 945 $104,787
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT):
Current liabilities:
Current portion of long term
obligations.......................... $ 2,030 $ (2,000)(a) $ 30
Accounts payable...................... 12,707 12,707
Income tax payable.................... 4,528 (6,800)(b)
(4,869)(c)
7,141 (e) --
Accrued expenses and other............ 8,328 8,328
--------- --------- ---------
Total current liabilities........... 27,593 (6,528) 21,065
--------- --------- ---------
Senior credit facility.................. 61,623 (61,623)(a) --
Senior subordinated notes............... 93,000 (93,000)(a) --
Deferred income taxes................... 1,116 1,116
Other liabilities....................... 1,409 1,409
--------- --------- ---------
Total liabilities................... 184,741 $(161,151) 23,590
--------- --------- ---------
Stockholders' equity (deficit)
New common stock...................... -- 635 (a) 635
Series A preferred stock.............. 13,467 (13,467)(d) --
Class A common stock.................. 280 (280)(d) --
Class B common stock.................. 96 (96)(d) --
Class L common stock.................. 40 (40)(d) --
Additional paid in capital............ 34,640 178,965 (a) 227,488
13,883 (d)
Accumulated deficit................... (129,026) (10,200)(b) (146,530)
(7,304)(c)
Notes receivable...................... (396) (396)
--------- --------- ---------
Total stockholders' equity (deficit).... (80,899) 162,096 81,197
--------- --------- ---------
$ 103,842 $ 945 $ 104,787
========= ========= =========
</TABLE>
See "Notes to Unaudited Pro Forma Consolidated Balance Sheet" on the following
page.
23
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
January 1, 2000
(a) Reflects our sale of 12,500,000 shares of common stock generating gross
proceeds of $200.0 million and the use of the estimated net proceeds of
$179.6 million, net of the estimated underwriting discount and the offering
expenses totaling $20.4 million, to (i) repurchase our senior subordinated
notes, (ii) repay our senior credit facility and (iii) pay prepayment
premiums (including accrued interest and related fees and expenses) of
$17.0 million related to our senior subordinated notes. See "Use of
Proceeds" and "Description of Indebtedness."
(b) Reflects the prepayment premiums of $17.0 million, before $6.8 million of
related income tax benefit (at a 40% effective tax rate), on our senior
subordinated notes resulting from the repayment of the debt in connection
with the offering.
(c) Represents the write-off of $12.2 million in deferred financing costs,
before $4.9 million of related income tax benefit (at a 40% effective tax
rate), resulting in an extraordinary loss of $7.3 million in connection
with the paydown of outstanding debt in connection with the offering.
Amounts will differ based on the effective date of the offering.
(d) Adjusted to give effect to the stock split and the reclassification.
(e) Reclass the income tax benefit to prepaid income taxes.
24
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected historical consolidated
financial data as of the dates and for the periods indicated. Our selected
historical consolidated statements of operations data for the fiscal years
ended July 3, 1999, June 27, 1998, June 28, 1997 and the selected historical
consolidated balance sheet data as of July 3, 1999 and June 27, 1998 were
derived from our historical consolidated financial statements that were audited
by KPMG LLP, whose report appears elsewhere in this prospectus. Our selected
historical statements of operations data for the fiscal years ended June 29,
1996 and June 30, 1995 and the selected historical balance sheet data as of
June 28, 1997, June 29, 1996 and June 30, 1995 were derived from our audited
financial statements that are not included in this prospectus. Our selected
historical consolidated statements of operations for the six months ended
December 26, 1998, and January 1, 2000, and the selected historical balance
sheet data as of December 26, 1998, and January 1, 2000, were derived from our
unaudited interim consolidated financial statements that appear elsewhere in
this prospectus. The selected historical consolidated financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of the Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the notes accompanying them included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Year Ended(a) Six Months Ended
------------------------------------------------- -----------------------
June 30, June 29, June 28, June 27, July 3, December 26, January 1,
1995 1996 1997 1998 1999 1998 2000
-------- -------- -------- -------- --------- ------------ ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Core................... $56,844 $52,714 $ 63,280 $ 90,622 $ 107,710 $ 51,059 $ 69,833
Non-core............... 40,901 38,616 41,079 70,012 31,353 16,956 9,065
------- ------- -------- -------- --------- -------- --------
Total revenue.......... $97,745 $91,330 $104,359 $160,634 $ 139,063 $ 68,015 $ 78,898
======= ======= ======== ======== ========= ======== ========
Gross margin............ 52,096 36,482 45,222 71,775 74,567 32,422 46,028
Research and
development............ 10,995 10,547 13,521 19,797 21,316 10,194 11,721
Selling, general and
administrative......... 20,450 18,653 15,654 19,678 19,794 10,489 8,642
Special charges (b)..... 7,428 3,257 11,196 -- 15,051 -- 3,102
------- ------- -------- -------- --------- -------- --------
Income from operations.. 13,223 4,025 4,851 32,300 18,406 11,739 22,563
Interest expense (c).... 715 403 63 64 2,955 64 9,312
Gain on sale of assets.. -- -- -- -- (10,734) -- --
Interest and other
expense (income), net.. (1,126) (2,390) 5,984 (1,984) (2,178) (1,418) (369)
------- ------- -------- -------- --------- -------- --------
Income (loss) from
continuing operations
before income taxes.... 13,634 6,012 (1,196) 34,220 28,363 13,093 13,620
Income tax expense...... 5,151 1,376 6,314 12,845 5,320 4,432 1,403
------- ------- -------- -------- --------- -------- --------
Income (loss) from
continuing operations.. 8,483 4,636 (7,510) 21,375 23,043 8,661 12,217
Loss from discontinued
operations (d)......... (3,560) (721) (909) -- -- -- --
Gain from extraordinary
item................... -- -- -- -- -- -- 170
------- ------- -------- -------- --------- -------- --------
Net income (loss)....... $ 4,923 $ 3,915 $ (8,419) $ 21,375 $ 23,043 $ 8,661 $ 12,387
======= ======= ======== ======== ========= ======== ========
Diluted income per share
(e).................... $ 0.26 $ 0.20 $ (0.43) $ 0.96 $ 0.86 $ 0.41 $ 0.29
Weighted average shares
outstanding
(diluted) (e).......... 18,712 19,639 19,439 22,264 26,278 20,971 36,149
Other Financial Data:
EBITDA (excluding non-
recurring
charges) (f)........... $23,690 $10,411 $ 19,791 $ 36,879 $ 38,422 $ 14,436 $ 27,918
Gross margin %.......... 53.3% 39.9% 43.3% 44.7% 53.6% 47.7% 58.3%
Cash provided by
operating activities... 16,019 11,476 10,397 22,345 24,450 14,810 17,103
Cash provided by (used
in) investing
activities............. (8,792) 6,109 (19,274) (13,490) 20,675 (17,833) (1,779)
Cash provided by (used
in) financing
activities............. (1,468) 3,145 (74) (1,940) (61,180) (3,039) (126)
Capital expenditures.... 3,508 4,390 3,358 8,139 7,694 4,245 2,608
Depreciation and
amortization........... 3,039 3,129 3,744 4,579 4,965 2,697 2,253
Balance Sheet Data:
Cash and cash
equivalents............ $ 9,960 $27,376 $ 18,425 $ 25,340 $ 9,285 $ 19,278 $ 24,483
Working capital......... 45,470 48,023 48,260 65,113 26,910 57,613 39,715
Total assets............ 77,691 87,570 90,622 108,009 87,795 110,123 103,842
Total debt.............. 3,774 4,063 1,709 1,523 170,030 1,447 156,653
Stockholders' equity
(deficit).............. 62,484 69,164 70,147 89,768 (106,912) 95,463 (80,899)
</TABLE>
See "Notes to Selected Historical Consolidated Financial Data" on the
following page.
25
<PAGE>
Notes to Selected Historical Consolidated Financial Data
(in thousands)
(a) Our fiscal year is based upon a 52/53 week operating cycle that ends on the
Saturday nearest June 30. All of the fiscal year periods presented
represent a 52-week operating cycle, except for fiscal year 1999 which
represents 53 weeks.
(b) Special charges consist of the following:
<TABLE>
<CAPTION>
Year Ended Six Months Ended
------------------------------------------ -----------------------
June
June 30, June 29, 28, June 27, July 3, December 26, January 1,
1995 1996 1997 1998 1999 1998 2000
-------- -------- ------- -------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Compensation cost(1).... -- -- -- -- $15,051 -- --
Change in business
strategy(2)............ 3,822 -- -- -- -- -- --
Discontinued product
lines(2)............... 3,606 -- -- -- -- -- --
Facility closings(3).... -- 1,757 -- -- -- -- --
Write-off of in-process
research and
development
costs(3)(4)............ -- 1,500 11,196 -- -- -- --
Litigation
settlement(5).......... -- -- -- -- -- -- 3,102
------ ------ ------- --- ------- --- ------
$7,428 $3,257 $11,196 -- $15,051 -- $3,102
====== ====== ======= === ======= === ======
</TABLE>
- ---------------------
(1) In connection with the recapitalization, the Company recorded a one-time
compensation charge of $15.1 million related to the accelerated vesting,
cash-out and conversion of employee stock options.
(2) We recorded charges of $3.8 million and $3.6 million in connection with the
severance and other exit costs associated with the redirection of our
multimedia strategy and the transfer of our test operations to offshore
subcontractors.
(3) We recorded a one-time charge of $1.8 million for a facility closing and a
$1.5 million charge for the non-deductible intangible write-off incurred in
connection with the acquisition of Value Media.
(4) We recorded a one-time charge of $11.2 million for the non-deductible
intangible write-off incurred in connection with our acquisition of
MicroClock, Inc.
(5) In connection with the establishment of our Arizona design center, we
recorded a one-time charge of $3.1 million.
(c) On May 11, 1999, we effected the recapitalization. We issued $100.0 million
in aggregate principal amount of our senior subordinated notes in
connection with the recapitalization and entered into our $95.0 million
senior credit facility. As of April 1, 2000, $93.0 million aggregate
principal amount of our senior subordinated notes was outstanding, and
$57.6 million was outstanding under our senior credit facility.
(d) In fiscal 1995, we acquired a 51% majority interest in ARK Logic, Inc., a
developer of complex graphic accelerator chips. Subsequently, in fiscal
year 1997, we disposed of our majority interest in ARK Logic, Inc. The
disposition of ARK Logic, Inc. was accounted for as a discontinued
operation and all periods prior to the disposition have been restated to
reflect this presentation.
(e) Diluted income per share and weighted average shares outstanding-diluted
have been adjusted to reflect the 1.6942-to-1 common stock-split that will
occur as of the pricing date of this offering.
(f) EBITDA represents earnings from continuing operations before interest,
taxes, depreciation, amortization, other income and expense and special
charges. EBITDA is presented because we believe that it is frequently used
by security analysts in the evaluation of companies. However, EBITDA should
not be considered as an alternative to cash flow from operating activities
as a measure of liquidity, as an alternative to net income, as an indicator
of our operating performance, or as an alternative to any other measures of
performance in accordance with generally accepted accounting principles.
26
<PAGE>
The following table sets forth a reconciliation of income (loss) from
continuing operations before income taxes to EBITDA (See notes to "Unaudited
Pro Forma Consolidated Statements of Operations" for additional details):
<TABLE>
<CAPTION>
Year Ended Six Months Ended
--------------------------------------------- -----------------------
June June June
30, 29, June 28, 27, July 3, December 26, January 1,
1995 1996 1997 1998 1999 1998 2000
------- ------- -------- ------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations,
before income taxes.... $13,634 $ 6,012 $ (1,196) $34,220 $ 28,363 $13,093 $13,620
Depreciation and
amortization........... 3,039 3,129 3,744 4,579 4,965 2,697 2,253
Interest expense........ 715 403 63 64 2,955 64 9,312
Interest and other
expense (income), net.. (1,126) (2,390) 5,984 (1,984) (2,178) (1,418) (369)
Gain on sale of assets.. -- -- -- -- (10,734) -- --
Special charges......... 7,428 3,257 11,196 -- 15,051 -- 3,102
------- ------- -------- ------- -------- ------- -------
EBITDA.................. $23,690 $10,411 $ 19,791 $36,879 $ 38,422 $14,436 $27,918
======= ======= ======== ======= ======== ======= =======
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We are a worldwide leader in the design, development and marketing of
silicon timing devices for a number of high-growth application segments. Our
silicon timing devices are used in a variety of consumer and business
electronics such as personal computers, or PCs, digital cameras, set-top boxes,
PC peripherals and DVD players. Our products are increasingly being used in
various communications applications including routers, switches, fiber optics,
cable modems and ADSL equipment.
Silicon timing devices are integrated circuits that emit timing signals or
pulses required to sequence and synchronize electronic operations to ensure
that information is interpreted at the right time and speed. All digital
devices require a timing signal and those with any degree of complexity require
silicon timing devices to time and synchronize their various operations.
We currently operate through two product groups: our core silicon timing
business, which includes products sold to the consumer and business electronics
and communications equipment industries, and our non-core business, which
includes integrated circuits called transceivers used primarily to receive and
transmit electronic data between PCs in networking applications and custom
mixed-signal integrated circuits that combine analog and digital technology.
While our core silicon timing business continues to grow, we expect that the
contribution from our non-core business will decline over time. Substantially
all of our research and development investment, as well as our marketing and
sales efforts, are focused, and will continue to focus, on our core silicon
timing business.
Prices for our products are predominantly a function of their position in
the product life cycle, design complexity, competitive environment, the price
of alternative solutions such as crystal oscillators and overall market demand.
We recognize revenue upon shipment, and substantially all of our sales are made
on the basis of purchase orders rather than long-term agreements.
After this offering and the use of the proceeds as previously described, we
expect an increase in our effective income tax rate from 18.8% for fiscal 1999
and 10.3% for the first six months of fiscal 2000. Had this offering occurred
at the beginning of our fiscal year, we estimate that our effective tax rate
for the first six months of fiscal 2000 would have been 20.3% due to the
elimination of interest expense. Our tax rate reflects the revenue we recognize
through our testing facility in Singapore. Because of this investment in
Singapore, we have been granted a tax holiday through 2003, which reduces our
overall tax expense. We intend to apply for an extension of this tax holiday
when it expires.
We will incur in connection with a recently settled lawsuit involving the
establishment of our Arizona facility an additional charge of approximately
$0.9 million. We do not anticipate any further charges for this settlement. We
expect to incur in the fourth quarter of fiscal 2000 a non-recurring
extraordinary charge for early debt extinguishment of approximately $17.5
million, net of tax, relating primarily to the premium on the redemption and
repurchase of our senior subordinated notes and the elimination of deferred
financing costs associated with the repayment of our senior subordinated notes
and the retirement of our senior credit facility.
28
<PAGE>
Recent Developments and Outlook
Our preliminary results for the three months ended April 1, 2000, the third
quarter of fiscal 2000, are summarized below and are compared to the quarter
ended March 27, 1999:
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 27, April 1,
1999 2000
--------- --------
(dollars in
millions)
<S> <C> <C> <C>
Revenue:
Core................................................. $27.6 $37.0
Non-core............................................. 7.4 4.6
----- -----
Total Revenue........................................ $35.0 $41.6
===== =====
Gross Margin.......................................... 20.4 25.5
Gross Margin %........................................ 58.3% 61.3%
Operating Profit...................................... $ 9.5 $13.0
Operating Margin %.................................... 27.1% 31.3%
</TABLE>
Our revenue for the third quarter of fiscal 2000 was $41.6 million, an 18.9%
increase over the corresponding quarter in fiscal 1999. Our core revenues
increased 34.0% over the corresponding quarter in 1999, and increased as a
proportion of total revenues to 88.9% from 78.9% over this period. The growth
in our core revenues reflected an increase in market share for our silicon
timing products in the PC industry, as well as sharply increased sales to the
communications industry and digital set-top box applications.
Gross margin increased from $20.4 million in the third quarter of fiscal
1999 to $25.5 million in the third quarter of fiscal 2000, an increase of
25.0%. The trend to higher margin products and material cost reductions
increased gross margin as a percentage of sales to 61.3% from 58.3% in the
similar period a year ago.
We believe that a number of current initiatives and recent product
introductions will make an increasing contribution to our financial performance
throughout the next 12 to 18 months. Some of these initiatives are highlighted
below.
. We have introduced a broad product family for the communications
industry, where growth and new broadband technologies are being driven
by the rapid pace of Internet infrastructure development. We have
numerous new design wins at communication OEMs including Motorola,
Lucent, Nortel, Cisco Systems, Fujitsu and Alcatel.
. We are currently involved in the design of silicon timing devices for
the next generation of PC motherboards. We are well positioned to
deliver significant volume for the Intel's Solano(R) and AMD's K7
motherboards this year. In particular, our new generation silicon timing
devices under development are targeted for the Timna and Willamette
processors, both of which are planned for mass production in calendar
2001.
. Since 1998 we have increased revenues from silicon timing devices for
digital set-top boxes and have developed substantial market share in
this rapidly growing market. As conversion into digital set-top box
applications accelerates, we have seen rapid growth in revenues from
set-top box OEMs such as Hughes, General Instruments and Scientific
Atlanta.
. We continue to realize cost savings, particularly in our manufacturing
and assembly processes. These cost savings have helped to improve our
gross margin from 58.3% during the three months ended March 27, 1999 to
61.4% in the three months ended April 1, 2000.
29
<PAGE>
Company History and Significant Transactions
We were founded in 1976 as a mixed-signal (analog/digital) circuit design
house, and we pioneered the silicon timing market in 1988, introducing products
for video and graphics applications.
The Recapitalization
In the recapitalization on May 11, 1999, affiliates of Bain Capital, an
affiliate of Bear Stearns and Co., Inc. and certain members of management made
an aggregate equity investment in our company of approximately $50 million as
part of agreements to redeem and purchase all of our outstanding shares of
common stock and vested options for consideration (including fees and expenses)
totaling $294.4 million.
Sale of Certain Assets from our Non-Core Business
On February 18, 1999, we sold certain intellectual property and equipment of
our non-core data communications business to 3Com Corporation for $16.0 million
in cash. We decided to reduce our ongoing investment in this business in order
to focus on our core silicon timing business.
We believe our core product groups will continue to experience stronger
growth and higher margins, as well as represent a more favorable risk profile
than our non-core business. Most importantly, we believe we have several
competitive advantages in our core product groups which will enable us to
sustain our leadership positions in these markets.
The sale of certain assets from our non-core business benefits us by
permanently eliminating certain costs associated with research and development
while at the same time allowing us to retain the right to sell certain of our
existing transceiver products over their remaining product life cycles. While
revenue from this product group will decline over the next few years, this sale
allows us to optimize this product group's cost structure and profit
contribution while these products continue to be sold.
Quarterly Results
The following table sets forth the unaudited historical quarterly revenue,
gross margins and gross profit percentage for our core and non-core product
groups:
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------------------------
1998 1999 2000
-------------------------- -------------------------- ------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Core.................. $22.8 $25.1 $23.3 $19.4 $24.1 $26.9 $27.6 $29.1 $32.4 $37.4
Non-core.............. 15.8 17.9 20.2 16.1 8.1 8.9 7.4 7.0 5.4 3.7
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total............... $38.6 $43.0 $43.5 $35.5 $32.2 $35.8 $35.0 $36.1 $37.8 $41.1
Gross Margin:
Core.................. $10.2 $12.1 $11.2 $ 8.5 $11.0 $13.2 $16.5 $17.9 $18.8 $21.9
Non-core.............. 7.3 7.5 8.4 6.6 3.9 4.3 3.9 3.9 3.2 2.1
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total............... $17.5 $19.6 $19.6 $15.1 $14.9 $17.5 $20.4 $21.8 $22.0 $24.0
Gross Margin %:
Core.................. 44.7% 48.2% 48.1% 43.8% 45.6% 49.1% 59.8% 61.5% 58.0% 58.6%
Non-core.............. 46.2 41.9 41.6 41.0 48.1 48.3 52.7 55.7 59.3 56.8
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total............... 45.3% 45.6% 45.1% 42.5% 46.3% 48.9% 58.3% 60.4% 58.2% 58.4%
</TABLE>
Growth in our business is being driven by our core silicon timing business.
Recent successes in the consumer and business electronics market, particularly
with our PC motherboards and digital set-top boxes, as well as our emerging
presence in communications equipment products, have helped drive this growth.
Our gross margin improvement in fiscal 1999 reflects our increasing volumes,
sales of higher margin products, cost savings at our third party fabrication
and assembly facilities and savings achieved by taking our testing procedures
in-house at our Singapore testing facility.
30
<PAGE>
Results of Operations
The following table sets forth statement of operations line items as a
percentage of total revenue for the periods indicated and should be read in
conjunction with the Consolidated Financial Statements and notes thereto.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
-------------------------- -----------------------
June 28, June 27, July 3, December 26, January 1,
1997 1998 1999 1998 2000
-------- -------- ------- ------------ ----------
(expressed as a percentage of total revenue)
<S> <C> <C> <C> <C> <C>
Revenues................... 100.0% 100.0% 100.0% 100.0% 100.0%
Core..................... 60.6 56.4 77.5 75.1 88.5
Non-core................. 39.4 43.6 22.5 24.9 11.5
Gross margin............... 43.3 44.7 53.6 47.7 58.3
Research and development
expense................... 13.0 12.3 15.3 15.0 14.9
Selling, general and
administrative expense.... 15.0 12.3 14.3 15.5 14.8
Non-recurring special
charge.................... 10.6 -- 10.8 -- --
----- ----- ----- ----- -----
Operating income........... 4.7 20.1 13.2 17.2 28.6
Other expense (income)..... 5.8 (1.2) (9.3) (2.1) (0.5)
Interest expense........... 0.1 -- 2.1 0.1 11.8
----- ----- ----- ----- -----
Income (loss) before income
taxes from continuing
operations................ (1.2) 21.3 20.4 19.2 17.3
Income tax expense......... (6.0) (8.0) (3.8) (6.5) (1.8)
----- ----- ----- ----- -----
Income (loss) from
continuing operations..... (7.2) 13.3 16.6 12.7 15.5
Loss from discontinued
operations................ (0.9) -- -- -- --
Extraordinary item......... -- -- -- -- 0.2
----- ----- ----- ----- -----
Net income (loss).......... (8.1)% 13.3% 16.6% 12.7% 15.7%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended January 1, 2000, as Compared to Six Months Ended December 26,
1998
Consolidated revenue increased by $10.9 million to $78.9 million for the six
months ended January 1, 2000 as compared to the prior year quarter. The
increase is primarily due to the increase in revenue generated by our core
silicon timing business.
Our core silicon timing revenue increased by $18.8 million to $69.8 million
for the six months ended January 1, 2000 as compared to the prior year period.
The increase is principally attributable to strong demand from PC motherboard
and set-top box products. We were successful in the sale of products to the
communications equipment industry, and we expect this end-market to increase as
a proportion of our total core business over time. Core revenues contributed
approximately 88.5% of consolidated revenue for the first six months of fiscal
2000, which represented an increase from 75.1% for the prior year period.
Our non-core revenue decreased by $7.9 million to $9.1 million for the six
months ended January 1, 2000, as compared to the prior year period. Non-core
revenue represented approximately 11.5% of total revenue in the first six
months of fiscal year 2000, as compared to 24.9% in the prior year period. This
is primarily due to shifting our focus to our core silicon timing business. We
sold certain intellectual property and equipment of our non-core business to
3Com Corporation on February 18, 1999, but will continue to sell and support
existing and the next generation Fast Ethernet transceiver products.
Foreign revenue (which includes shipments of integrated circuits, or ICs, to
foreign companies as well as offshore subsidiaries of US multinational
companies) was 72.1% of total revenue for the first six months of fiscal 2000
as compared to 68.9% of total revenue in the prior year period. While the
percentage increase reflected growing sales to the Pacific Rim markets, certain
of our international sales were to customers in the Pacific Rim region, which
in turn sold a portion of their products to North America, Europe and other
non-Asian markets. Our sales are denominated in U.S. dollars, thus minimizing
foreign currency risk.
31
<PAGE>
Cost of sales consists of costs related to the purchase of processed wafers,
assembly and testing services provided by third-party suppliers, as well as
costs arising from in-house product testing, shipping, quality control and
manufacturing support operations. Cost of sales decreased $2.7 million to $32.9
million for the six months ended January 1, 2000, as compared to the prior year
period, due to material cost savings in the manufacturing processes, cost
savings from our in-house testing and favorable product mix trends. Cost of
sales as a percentage of total revenue was 41.7% for the first six months of
fiscal 2000 as compared to 52.3% in the prior year period.
Research and development, or R&D, expense increased $1.5 million to $11.7
million for the first six months of fiscal 2000 from $10.2 million in the prior
year period. As a percentage of revenue, research and development decreased to
14.9% as compared to 15.0% in the first six months of fiscal 1999. Our
continued emphasis on R&D has contributed to the increase in expense with
greater spending in research and development for our core silicon timing
business. This increase is slightly offset by the decreased expenses for the
non-core business. This increased expense represented a lower percentage of
revenue due to the significant increase in sales during the second quarter of
fiscal 2000.
Selling, general and administrative expense increased $0.8 million to $11.1
million for the first six months of fiscal 2000 as compared to the prior year
period. The increase is primarily due to the legal fee expense from a recently
settled lawsuit. As a percentage of total revenue, selling, general and
administrative expenses decreased to 14.1% of revenue as compared to 15.3% in
the prior year period.
As a party to a consulting agreement with both Bain Capital and Bear
Stearns, we incurred a management fee for the six months ended January 1, 2000
equal to $0.5 million, or 0.6% of revenue. There was no management fee in the
prior year period.
In dollar terms, operating income was $22.6 million in the first six months
of fiscal 2000 compared to $11.7 million in the first six months of fiscal
1999. Expressed as a percentage of revenue, operating income was 28.6% and
17.2% in the first six months of fiscal 2000 and the prior year period,
respectively.
Interest and other income was $0.4 million for the six months ended January
1, 2000 and $1.4 million in the prior year period. Interest income decreased as
a result of lower cash balances available for investing.
Interest expense was $9.3 million in the first six months of fiscal 2000 and
$0.1 million in the first six months of fiscal 1999. The increase in interest
expense is attributable to the financing obtained in connection with our May
1999 recapitalization.
Gain on the early retirement of bonds, net of taxes, was $0.2 million for
the first six months of fiscal 2000. There was no gain on retirement of bonds
during the prior year period.
Our effective income tax rate was 10.3% for the first six months of fiscal
2000 as compared to 33.9% in the prior year period. The decrease in the tax
rate is primarily attributable to the tax benefits of our Singapore operations
and benefits that we receive for additional interest expense. As our Singapore
facility becomes more profitable, it causes our consolidated tax rate to
decrease due to Singapore's tax holiday, in which operating income is not
taxable for five years ending in fiscal 2003.
Fiscal Year 1999 as compared to Fiscal Year 1998
We achieved revenue of $139.1 million in fiscal year 1999, as compared to
$160.6 million in fiscal year 1998. This decrease in fiscal year 1999 revenue
was attributable to a decrease in revenue from the non-core product lines.
Our core component revenue increased $17.1 million to $107.7 million for
fiscal year 1999 as compared to the prior year. The increase is attributable to
strong demand from PC motherboard OEM customers.
32
<PAGE>
Core products contributed approximately 77.5% and 56.4% of total revenue in
fiscal years 1999 and 1998, respectively. In fiscal 1999 we were involved in
the design of frequency timing generators, or FTGs, a form of silicon timing
device, for the next generation of PC motherboards. In particular, our FTGs are
being used for the Pentium(R) III (high-end motherboard), Whitney (sub-$1,000
PC motherboard) and Mobile BX (new notebook motherboard) platforms, all of
which were released in calendar 1999. We continue to develop products for our
existing clients and expand into high performance timing solutions supporting
networking, communication, workstation and server applications.
Our non-core component revenue represented approximately 22.5% of total
revenue in fiscal year 1999, as compared to 43.6% in fiscal year 1998. This is
due to the decreased market share from network system suppliers of the single
chip 10/100-Mb transceivers. In fiscal year 1998, we shifted our focus away
from the transceiver market to our core business. We sold certain intellectual
property and equipment of our non-core business to 3Com Corporation on February
18, 1999, but will still continue to sell and support existing and the next
generation Fast Ethernet transceiver products.
Foreign revenue, which resulted primarily from sales to offshore customers
was 68.8% and 58.8% of total revenue in fiscal years 1999 and 1998,
respectively. While the percentage increase reflected growing sales to the
Pacific Rim markets, certain of our international sales were to customers in
the Pacific Rim region who in turn sold some of their products to North
America, Europe and other non-Asian markets. Our sales are denominated in U.S.
dollars.
Cost of sales as a percentage of total revenue was 46.4% in fiscal year
1999, as compared to 55.3% in fiscal year 1998. We have continued to realize
material cost savings in the manufacturing processes. We have received price
reductions from their subcontractors and are also realizing savings from our
internal testing site in Singapore. These cost savings and favorable product
mix trends have helped to improve our gross margin.
Research and development expense expressed as a percentage of revenue was
15.3% in fiscal year 1999, as compared to 12.3% in fiscal year 1998. In dollar
terms, research and development spending increased 7.7% from fiscal year 1998
to 1999. The increase is attributable to a compensation charge of $1.3 million
arising from the modifications of stock options owned by certain employees
affected by the sale of assets to 3Com. As a result of the sale of assets to
3Com, we expect that there will be savings in research and development
expenses, which will be offset by additional expenses incurred to support our
expansion into high performance clocking solutions supporting networking,
communication, workstation and server applications.
Selling, general and administration expense was 14.1% and 12.1% of total
revenues in fiscal years 1999 and 1998, respectively. In monetary terms,
expenses have increased 0.6% from fiscal year 1998 to fiscal year 1999. The
increase from 1998 to 1999 represents increased charges for the proxy contest
relating to our annual shareholders' meeting. We were faced with a proxy
contest that was waged by our former Chief Executive Officer. As a result of
the proxy contest, we incurred mailing, legal and printing costs of
approximately $0.8 million for our annual meeting, in excess of those
historically incurred for routine and annual shareholders' meetings, during
both the second and third quarters of fiscal year 1999. This was offset by the
decrease in variable selling expenses as a result of decreased revenues.
In connection with the recapitalization, we recorded a compensation charge
of $15.1 million related to the accelerated vesting, cash-out and conversion of
employee stock options.
Expressed as a percentage of revenue, operating income was 13.2% and 20.1%
in fiscal years 1999 and 1998, respectively. In dollar terms, operating income
was $18.4 million in fiscal year 1999 compared to $32.3 million in fiscal year
1998. Fiscal year 1999 includes a special charge of $15.1 million relating to
the vesting of outstanding options arising from the recapitalization.
Accordingly, operating income before special charges was 24.0% of revenue in
fiscal year 1999 as compared to 20.1% in fiscal year 1998.
33
<PAGE>
In the third quarter of fiscal year 1999, we sold intellectual property and
engineering hardware and software from our non-core product line to 3Com
Corporation for $16.0 million in cash. We recognized $10.7 million as the gain
on the sale.
Interest and other income was $2.2 million in fiscal year 1999 and $2.0
million in fiscal year 1998. Interest income increased as a result of higher
cash balances available for investing.
Interest expense was $3.0 million in fiscal year 1999 and $0.1 million in
fiscal year 1998. The increase in interest expense is attributable to the
financing obtained in connection with the recapitalization.
After adjusting for minority interest and equity investment, our effective
tax rate related to income from continuing operations was 18.8% and 37.5% for
fiscal years 1999 and 1998, respectively. The effective tax rate for fiscal
years 1999 and 1998 reflects the tax-exempt status of our Singapore operation,
which has been given pioneer status, or exemption of taxes on non-passive
income for five years. The significant decrease from fiscal years 1998 to 1999
is the result of the profitability of the Singapore operations being larger
than the domestic operations. We do not currently calculate deferred taxes on
our investment in our Singapore operations, as all undistributed earnings are
permanently reinvested back into the Singapore facility. If we were to record
deferred taxes on our investment, the amount would be a $4.3 million
liability.
Fiscal year 1999 reflects a net income of $23.0 million as compared to a
net income of $21.4 million for fiscal year 1998. Excluding special charges,
however, net income for fiscal year 1999 would have been $32.8 million. The
changes in income are disclosed in the previous paragraphs.
Fiscal Year 1998 as compared to Fiscal Year 1997
We achieved revenue of $160.6 million and $104.4 million in fiscal years
1998 and 1997, respectively.
Our core component revenue increased $27.3 million to $90.6 million for
fiscal year 1998 as compared to the prior year. The acquisition of MicroClock,
Inc. in the third quarter of fiscal year 1997 accounted for $14.1 million of
the increase with the remaining amount attributable to strong demand from PC
motherboard OEM customers. The acquisition of MicroClock, Inc. allowed us to
penetrate the market for silicon timing devices outside of our existing PC
customer base.
Core silicon timing devices contributed approximately 56.4% and 60.6% of
total revenue in fiscal years 1998 and 1997, respectively. Although the
silicon timing markets for motherboard and PC peripheral applications are
expected to continue to be major sources of revenue, we intend to increase our
presence in non-PC applications which comprised approximately 6% of total
silicon timing component revenue in fiscal year 1997.
Our non-core component revenue represented approximately 43.6% in fiscal
year 1998 and 32.9% of total revenue in fiscal year 1997. Increases in fiscal
year 1998 revenue were due to increased penetration of our transceiver
products within network system suppliers and revived demand for PC video
graphics products. In fiscal year 1999, we shifted our focus away from the
non-core transceiver market to our silicon timing device product group. We
sold certain intellectual property and equipment of our non-core product group
to 3Com Corporation on February 18, 1999, but still continue to sell and
support existing and next generation Fast Ethernet transceiver products.
As a result of the merger of Turtle Beach and Voyetra, Turtle Beach was de-
consolidated commencing November 30, 1996. Our 35% share of net losses at
Voyetra was recorded under the equity method of accounting during the
remainder of fiscal year 1997. Revenues were 6.5% of total revenue in fiscal
year 1997.
During the fourth quarter of fiscal year 1997, we determined that, due to
significant events and changes in circumstances, it was probable that our
investment in Voyetra would not be recoverable. Accordingly, we
34
<PAGE>
recorded an impairment loss of approximately $7.1 million on our investment in
Voyetra in the fourth quarter of 1997.
Foreign revenue, which resulted primarily from sales to offshore customers,
was 58.8% and 60.3% of total revenue in fiscal years 1998 and 1997,
respectively. The decrease in fiscal year 1998 reflected a substantial increase
of transceiver shipments in North America. Certain of our international sales
were to customers in the Pacific Rim who in turn sold some of their products to
North America, Europe and other non-Asian markets. Our sales are denominated in
U.S. dollars.
Cost of sales consists of costs related to the purchase of processed wafers,
assembly and testing services provided by third-party suppliers, as well as
costs arising from in-house product testing, shipping, quality control and
manufacturing support operations. Cost of sales as a percentage of total
revenue was 55.3% in fiscal year 1998 and 56.7% in fiscal year 1997. The
decrease in cost of sales in fiscal year 1998 reflected reduced material costs,
conversion to in-house testing in Singapore and favorable product mix trends.
These cost savings have helped to improve our gross margin.
Research and development expense expressed as a percentage of revenue was
12.3% in fiscal year 1998, as compared to 13.0% in fiscal year 1997. In dollar
terms, research and development spending increased 46.4% from fiscal year 1997
to 1998, primarily as a result of the hiring of additional engineering
personnel, investment in new design tools and increased activity related to new
product development and enhancement programs for existing standards products.
Selling, general and administration expense was 12.1% and 14.5% of total
revenues in fiscal years 1998 and 1997, respectively. In monetary terms,
expenses increased 28.6% from fiscal year 1997 to fiscal year 1998. The
increase from fiscal year 1997 to fiscal year 1998 primarily represents
increases in variable costs associated with revenue growth, including $0.5
million for bad debt reserves.
Fiscal year 1997 included a special charge of $11.2 million as a result of
the write-off of in-process research and development costs arising from the
acquisition of MicroClock.
Expressed as a percentage of revenue, operating income was 20.1% and 4.7% in
fiscal years 1998 and 1997, respectively. In dollar terms, operating income was
$32.3 million in fiscal year 1998 as compared $4.9 million in fiscal year 1997.
Fiscal year 1997 includes a special charge of $11.2 million as a result of the
write-off of in-process research and development costs arising from the
acquisition of MicroClock. Accordingly, operating income before special charges
was 20.1% of revenue in fiscal year 1998, as compared to 15.3% in fiscal year
1997.
Interest and other income was $2.0 million in fiscal year 1998 as compared
to $1.8 million in fiscal year 1997. Interest income increased as yields on our
investments improved.
Interest expense was $0.1 million in fiscal year 1998 and in fiscal year
1997. Interest related to the PIDA loan on the Valley Forge building.
After adjusting for minority interest and equity investment, our effective
tax rate related to income from continuing operations was 37.5% and 95.8% for
fiscal years 1998 and 1997, respectively. The effective tax rate for fiscal
year 1998 reflects the tax-exempt status of our Singapore operation, which has
been given pioneer status, or exemption of taxes on non-passive income for five
years. The effective tax rate for fiscal year 1997 includes $11.2 million for
the non-deductible intangible write-off related to the acquisition of
MicroClock, Inc. and a $7.1 million capital loss for the impairment of the
Voyetra investment.
Fiscal year 1998 reflects a net income of $21.4 million as compared to a
loss of $8.4 million for fiscal year 1997. Excluding special charges, equity
investment related charges and minority interest, however, net income for
fiscal year 1997 was $10.6 million. The changes in income are disclosed in the
previous paragraphs.
35
<PAGE>
Discontinued Operations
During the third quarter of fiscal year 1997, we implemented a plan, with
approval of the Board of Directors, to dispose of our majority interest in our
subsidiary, ARK Logic, within a 12-month period. Unlike our core business of
developing mixed-signal components, ARK Logic uses different design tools and
technology to engineer complex digital circuits. Accordingly, we have presented
ARK Logic as discontinued operations and all prior periods have been restated
to reflect this presentation. We recorded a charge of $1.5 million in the third
quarter of fiscal year 1997, including severance and other exit costs.
Subsequently, on June 17, 1997, we sold approximately 80% of our holdings in
ARK Logic to Vision 2000 Ventures, Ltd. for which a gain of $2.4 million,
including the reversal of severance and facility termination accruals, was
recorded. Our remaining ownership interest in ARK Logic of approximately 11%
was written off in the fourth quarter of fiscal year 1997.
Liquidity and Capital Resources
At January 1, 2000, our principal sources of liquidity included cash and
investments of $24.8 million as compared to the July 3, 1999 balance of $9.6
million. Net cash provided by operating activities was $17.1 million in the
first six months of fiscal 2000, as compared to $14.8 million in the prior year
period. The cash provided by operating activities in the first six months of
fiscal 2000 consisted mainly of earnings before interest, taxes, depreciation
and amortization expenses, or EBITDA, of $27.9 million offset by changes in
operating assets of $1.6 million, interest payments of $8.6 million and income
tax payments of $0.9 million. EBITDA increased $13.5 million over the same
period in 1999 primarily due to the increases in gross margin, as discussed
above. Our days sales outstanding remained flat at 49 days, while inventory
turns increased from 7.28 times in fiscal 1999 to 9.60 times in the first six
months of fiscal 2000.
Purchases for property and equipment were $2.6 million in the first six
months of fiscal 2000 as compared to $4.2 million in the prior year period. The
decrease is primarily due to our relocation into our new facility in San Jose
during the second quarter of fiscal 1999. Purchases of property and equipment
during fiscal 2000 in the amount of $1.3 million were invested in the start-up
of our new Arizona facility.
During December 1999, the Company received $13.5 million from Intel in
exchange for 3.4 million shares of $4.00 par value Series A preferred stock.
We purchased $2.0 million of our senior subordinated notes below par in
September, resulting in a gain of $36,000 net of income taxes, and $5.0 million
below par in November, resulting in a gain of $0.1 million net of income taxes.
In September, we paid $6.1 million of principal on our term A and B loans and
$0.3 million in November, as well as $8.6 million in interest during the first
six months of fiscal year 2000. Certain of the our loan agreements require the
maintenance of specified financial ratios and impose financial limitations. At
April 1, 2000, we were in compliance with the senior credit facility covenants.
Immediately following this offering, we will repay all outstanding
obligations under our senior credit facility and terminate it, and we intend to
enter into a new revolving credit facility. The new revolving credit facility
will be used for working capital and general corporate purposes.
We believe that the net proceeds from this offering, together with funds
expected to be generated from our operations and borrowings under our new
revolving credit facility will be sufficient to meet our anticipated cash needs
for working capital and capital expenditures for the foreseeable future.
Thereafter, we may need to raise additional funds in future periods to fund our
operations and potential acquisitions, if any. Any such additional financing,
if needed, might not be available on reasonable terms or at all. Failure to
raise capital when needed could seriously harm our business and results of
operations. If additional funds were raised through the issuance of equity
securities or convertible debt securities, the percentage of ownership of our
shareholders would be reduced. Furthermore, such equity securities or
convertible debt securities might have rights, preferences or privileges senior
to our common stock.
36
<PAGE>
Inflation
Inflation has not had a significant impact on our results of operations.
Year 2000
Computer systems and software must accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, many software and
computer systems that accepted only two digit entries needed to be upgraded in
order to accept date beginning January 1, 2000. To date, we have not
experienced any date-related problems with our software. In addition, we have
not been made aware of, nor have we experienced, date related problems with any
third-party software. In addition, we do not believe that we will incur
material costs in the future because of date related problems.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities," which
defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal
years beginning after June 15, 2000. We will adopt the requirements of this
statement in our first fiscal quarter in fiscal year 2001.
Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exposures. Our sales are denominated in U.S. dollars,
accordingly, we do not use forward exchange contracts to hedge exposures
denominated in foreign currencies or any other derivative financial instruments
for trading or speculative purposes. The effect of an immediate 10% change in
exchange rates would not have a material impact on our future operating results
or cash flows.
Interest Rate Risk. Because our obligations under our senior credit facility
bear interest at variable rates, our results of operations are sensitive to
changes in prevailing interest rates. We currently do not engage in interest
rate hedging activities. We manage our interest rate risk by keeping variable
rate instruments at less than 50% of total debt instruments.
37
<PAGE>
INDUSTRY OVERVIEW
Overview
Semiconductors, also referred to as integrated circuits, are the basic
building blocks used to create an increasing variety of electronic products and
systems. Since the invention of the transistor in 1948, continuous improvements
in semiconductor process and design technologies have led to smaller, more
complex and more reliable devices at a lower cost per function. The two basic
functional technologies for semiconductor products are analog and digital.
Analog (or linear) devices monitor, amplify or transform analog signals.
Analog signals vary continuously over a wide range of values. Analog circuits
provide a critical interface between electronic systems and a variety of real-
world phenomena such as sound, light, temperature, pressure, weight and speed.
Digital devices perform binary arithmetic functions on data represented by a
series of on/off states mathematically represented by "1s" and "0s".
Historically, the digital integrated circuit market has been primarily focused
on the fast growing markets for computing and information technology systems.
Increasing demands for high-throughput computing and networking in recent years
have led to drastic improvements in digital device performance. An example of
these improvements is subsequent generations of ever-faster microprocessors
that power personal computers.
Electronic systems continuously translate analog signals into digital data
and digital data into analog signals. Mixed-signal integrated circuits combine
analog and digital circuitry on the same chip to process both analog signals
and digital data. Historically, analog and digital circuitry has been developed
separately given the technical difficulties associated with combining analog
and digital circuitry onto a single integrated circuit. As a result, system
manufacturers have generally addressed mixed-signal requirements using printed
circuit boards containing many separate analog and digital circuits acquired
from multiple suppliers. However, in an effort to improve performance, decrease
system size and reduce costs, system designers are increasingly requiring the
integration of both analog and digital functions onto a single chip.
Silicon Timing Devices
Every microprocessor and, in fact, all electronic devices must incorporate a
means to time and synchronize their various operations. Silicon timing devices
are mixed-signal integrated circuits, usually on a single chip that, like
miniature "clocks," emit timing signals or pulses used to sequence and
synchronize electronic operations.
Growth in our markets is being driven by the rapid pace of infrastructure
development for the Internet, the increasing complexity of our customers' end
products, and the transition from traditional analog devices to digital
technologies. Internet infrastructure expansion is now largely broadband based,
requiring higher operating frequencies and more complex digital equipment. This
advancement has driven the continued proliferation of technologically complex
consumer and business electronic devices that help optimize the Internet
experience. In addition, the transition from traditional analog devices to
digital devices has led to increasing consumer adoption of digital technologies
such as HDTV or DVD players. Our silicon timing devices are well suited to
these developments as they operate in analog and digital environments (i.e.,
mixed-signal) and can manage multiple frequencies, have high programmability
and generally require less power than traditional timing products such as
crystal oscillators, which are predominantly quartz based crystals that
resonate at a single frequency.
Silicon timing devices are an indispensable part of the electronic world as
they ensure the smooth flow of data along crowded electronic pathways by
integrating and sequencing multiple functions within complex systems. As each
new generation of electronic devices becomes faster, adds more functions and
accommodates more peripheral equipment, the task of designing "clocks" to
control, sequence and synchronize their
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operations grows more complex and critical. Silicon timing devices perform
critical timing control, sequence and synchronization functions for a wide
variety of application markets, including: (1) computing systems, such as PCs,
workstations, Internet appliances, disk drives and printers; (2) digital
multimedia electronics, such as set-top boxes, DVDs, digital cameras and game
machines; (3) Internet backbone equipment, such as switches, routers and
framers; (4) Internet access equipment, such as cable and ADSL modems; and (5)
network systems, such as servers and storage devices.
The timing device market, including crystal oscillators, was approximately
$2.8 billion in 1999. Given the growth in electronics, communications and the
Internet, industry sources expect this market to grow to over $3.8 billion by
2001, an 18% per year growth rate. We expect, however, that silicon timing
devices will grow at a much faster rate. In 1999, the total market for silicon
timing devices was approximately $378 million, or 14% of the total market for
timing devices, and is expected to grow to over $850 million, or 23% of the
total market, by 2001, a growth rate of approximately 50% per year. Growth
tends to be driven by the continued conversion of analog devices to digital
systems and the increasing complexity of our customers' products, particularly
given the demands of the Internet for bandwidth and speed.
Silicon timing devices emerged through the design of frequency timing
generators, or FTGs, predominantly for PCs. This began in 1990, when we
designed the first FTG for a PC, and gathered momentum when our design was used
with the Intel(R) Pentium(R) processor in 1993. In 1999, the worldwide market
for silicon timing devices for PC FTGs, including notebook computers, was
approximately $150 million, and we estimate that we have a 55% market share.
Industry sources estimate that this market will grow to approximately $212
million by 2001, a 19% per annum growth rate. This growth is being driven by
two primary factors: (1) growth in the global PC market resulting largely from
the advent of the inexpensive (sub-$1,000) PC and the increasing popularity of
the Internet, and (2) the increasing number of FTGs per PC motherboard, known
as clock density. Industry sources estimate that clock density will continue to
increase from current levels. The causes of increasing clock density include:
(a) higher microprocessor speeds requiring the separation of frequencies onto
multiple clocks to function efficiently; (b) increasing CPU power and functions
requiring more frequencies; and (c) the ongoing growth of peripheral
applications.
Historically, the silicon timing market and the market for FTGs for PC
motherboards, in particular, have provided stable average prices and consistent
margins. This market is less susceptible to downward pricing pressures and
commoditization as silicon timing devices are specifically tailored to certain
architectures and are highly sophisticated and differentiated products. Given
their customized and specialized nature, individual silicon timing device
products tend to be produced in small volume.
We believe silicon timing devices have limited technological substitution
risk. There are numerous technological, cost and design barriers that limit the
functional integration of silicon timing devices into other chips such as:
. Yield issues: The defect rate of silicon timing devices would adversely
impact the production yield of more expensive chips;
. Performance issues: Noise from the microprocessor would materially
degrade the tight performance requirements of silicon timing devices;
. Customized nature of silicon timing devices: Silicon timing devices are
specifically tailored for memory type, microprocessor speed, and
architecture. Supporting all configurations significantly increases cost
and complexity;
. Unique design issues: The complexity of silicon timing device designs
could negatively affect the product time-to-market due to design and
debug time;
. Technological barriers: The analog component of a mixed-signal
integrated circuit does not operate efficiently at the low voltage
levels of high speed digital cores; and
. Pin count restraint: Additional timing signal functions would add
several "input/output" pins to a chip adding significant packaging and
die costs as well as exacerbating severe space constraints.
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BUSINESS
We are a worldwide leader in the design, development and marketing of
silicon timing devices for a number of high-growth application segments. Our
products are used in a variety of computing systems (e.g., PCs, workstations,
Internet appliances, disk drives and printers) and digital multimedia
electronic devices (e.g., set-top boxes, DVDs, digital cameras and game
machines). We are also increasingly designing and producing silicon timing
devices for Internet backbone equipment (e.g., switches, routers and framers),
Internet access equipment (e.g., cable and ADSL modems) and network systems
(e.g., servers and storage devices).
Silicon timing devices are integrated circuits that emit timing signals or
pulses required to sequence and synchronize electronic operations to ensure
that information is interpreted at the right time and speed. All digital
devices require a timing signal and those with any degree of complexity require
silicon timing devices to time and synchronize their various operations.
We have developed a reputation for engineering excellence and innovative
technology in silicon timing design. We pioneered the silicon timing market in
1988, introducing silicon timing devices for video and graphics applications.
Since then, we have consistently led the industry with several technical
designs, including delivering the first silicon timing device for the PC
motherboard in 1990. Our ongoing focus on product innovation has led to the
introduction of approximately 424 new products into the marketplace over the
past three fiscal years. We are the leading supplier of silicon timing devices
to several markets, including PCs and digital set-top boxes, and we are
continuing to design new products for communications equipment companies such
as Motorola, Lucent, Nortel, Cisco Systems, Fujitsu and Alcatel. Over 40% of
our current design opportunities are for communications equipment companies. A
design opportunity reflects a request from a customer or potential customer for
a silicon timing device. In the first six months of fiscal 2000, we converted
over 80% of our design opportunities into design wins, which could lead to
future production orders.
We have developed long-standing and valuable relationships with the majority
of leading original equipment manufacturers, or OEMs, of consumer and business
and communications equipment electronics. We work closely with these OEMs to
develop unique and proprietary timing, sequencing and synchronization solutions
and are closely integrated into their product design and development process.
Our top OEM customers include such companies as Asustek, Hughes Networks,
Compaq, Dell, IBM, Echostar, Intel, E-Machines, General Instruments and Hewlett
Packard.
Competitive Strengths
Worldwide Leadership Position. We pioneered the market for silicon timing
devices in 1988, shipped the first standard silicon timing device for desktop
PC motherboards in 1990, and we believe we were the first to meet Intel's
silicon timing device specifications for its Pentium(R) microprocessor series
in 1993. We believe that we currently hold the leadership position in the
largest market for silicon timing devices within desktop PC and notebook
motherboards, with an estimated worldwide market share of 55%. In addition, we
believe we have leadership positions in other markets for silicon timing
devices, including set-top boxes and disk drives.
Defensible Technology and Design Expertise. For over twenty years, we have
developed libraries of proprietary and patented mixed-signal integrated circuit
designs and have invested in extensive computer-aided design and engineering
resources specifically designed to support the increasing complexity and
customized nature of silicon timing devices. Our focus on product innovation
and leading technology has resulted in the introduction of approximately 424
new products into the marketplace over the past three fiscal years. We work
closely with OEMs to develop unique timing, sequencing and synchronization
solutions and are highly integrated into their product design and development.
As device attributes and system speeds continue to increase, silicon timing
device designs become more complex. As a result, our combination of analog and
digital expertise is an important core competency and a significant barrier to
entry.
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Industry First Designs
. 1988--First to develop frequency timing generator
. 1993--First to develop silicon timing for Pentium(R) motherboard
. 1996--First to develop Fast Ethernet transceiver
. 1997--First to incorporate EMI reduction into motherboard clocks
. 1998--First to develop 1 gigahertz fiber channel clocks
. 1998--First to develop pixel clock for flat panel displays
. 1999--First to develop 3.3 volt multiple VCXO in set-top box industry
. 2000--First to develop fully programmable clock for PCs
Superior Product Performance and Attributes. We believe that we have the
leading position in key timing performance measures. Industry research suggests
that the technical capabilities of our products are, on average, superior to
those of our major competitors. The combination of these performance attributes
allows our products to operate faster than those of our competitors and
improves overall system performance. Industry sources measured the products of
the major competitors across five performance criteria including jitter (error
in signal shape), skew (error in signal repetition), number of frequencies,
breadth of products and EMI (electromagnetic interference). We ranked first in
4 of the 5 categories and second in the fifth.
<TABLE>
<CAPTION>
No. of
Company Jitter Skew Frequencies Breadth EMI
------- ------ ---- ----------- ------- ---
<S> <C> <C> <C> <C> <C>
Integrated Circuit Systems.................. 1 1 1 1 2
Cypress..................................... 2 2 2 2 1
IMI......................................... 3 3 3 3 3
</TABLE>
Low Cost Provider. We believe that we are one of the lowest cost producers
of silicon timing devices because of our ability to leverage research and
development costs over a broad product line, our close relationship with
suppliers and our position as one of the largest providers to the silicon
timing device market. In addition, we use third-party manufacturers to supply
silicon wafers and assemble our products. Therefore, we do not incur the
significant fixed costs of building, operating and upgrading a wafer foundry or
assembly house. As a result of our leadership position, extensive product
portfolio and highly variable cost structure, we are able to offer a compelling
value proposition to customers of high performance, quality products at
competitive prices.
Superior Time-to-Market Capabilities. Minimizing the time new products take
to reach the market is an important purchase criterion for our customers who
are increasingly trying to improve inventory and supply chain management to
meet rapidly growing demand forecasts. We believe that our close relationships
with leading third-party manufacturers, in-house testing capabilities, leading
design expertise, large platform of existing designs, and close involvement
with customer design teams allow us to anticipate customers' needs and provide
faster product solutions than other competitors. Several examples illustrate
our competitive advantage in this area. First, we developed the first chip in
the industry whose timing signals can be pre-set from 1 to 160 MHZ by the user
without additional external devices, software or programmers, thereby
eliminating the high cost and long lead times associated with certain
customized silicon timing devices. Second, we established our own testing and
quality assurance facility in Singapore near a major third-party manufacturer
in order to shorten delivery times to customer assembly facilities. Third, we
have developed unique relationships with certain third-party manufacturers to
store work-in-process chips (i.e., wafer banks) that are ready to be finished
in half the normal production time upon order. Finally, we have a substantial
portfolio of designs or building blocks from which we can draw upon to develop
customized solutions quickly. We believe that the resulting time-to-market is
substantially less than those of our competitors, thereby creating a
significant competitive advantage with OEM customers.
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Broad and Diversified Product Line. We have a broad product line consisting
of unique, customized solutions for a wide variety of application and customer
segments, including consumer electronics, communications systems, medical
devices and computer systems. Our ability to provide OEM customers with silicon
timing technology and design expertise across their entire product line (e.g.,
desktop PCs, mobile PCs, servers and workstations) is a significant competitive
advantage. For example, we have the ability to produce an unusually wide range
of frequencies for our customers, from 66.6 megahertz silicon timing devices
for older generation motherboard systems to 133 megahertz silicon timing
devices for new generation Intel(R) Pentium(R) III processors to 460 megahertz
silicon timing devices for very high performance workstations. In addition, our
wide breadth of products helps to diversify our revenue base so that we are not
dependent on the success of any single product. In fact, for the year ended
July 3, 1999, the average product represented less than $300,000 of revenue. We
believe that our broad and diversified product line will continue to provide
significant value for our customers and enable us to expand our leadership
position.
Blue Chip Customer Base. We have long-standing and valuable relationships
with most of the major OEMs of personal computers, peripherals and
communications equipment. Certain systems architects, including Intel, Texas
Instruments and Broadcom, reference our frequency timing components on their
data sheets. We are closely integrated with the design teams of our system
manufacturer customers and often are afforded the opportunity to solve their
timing requirements early in their development cycle. The risk and cost to OEMs
of certifying new vendors, our worldwide leadership position and continuing
product innovation all provide significant competitive advantages and switching
barriers versus smaller competitors.
Experienced Management Team with Significant Equity Ownership. We are led by
a team of eleven senior managers who average nearly eight years of experience
with us and collectively possess over 200 years of experience in the
semiconductor industry. Our management has demonstrated its ability to develop
leading market share positions in several application segments, develop
innovative core technology and achieve strong financial performance. After the
offering, the senior management team and many other employees will own new
common stock and options together representing up to approximately 18% of our
common stock on a fully-diluted basis.
Business Strategy
Our business strategy is to focus on our core silicon timing business and
provide customized and increasingly complex products to our expanding and
diversified customer base. We have developed a set of strong design systems and
business processes that have enabled us to achieve a leading market position
and a strong track record of profitable growth. We intend to continue this
business strategy and strengthen our competitive position through the following
initiatives:
. Identify and target new market opportunities where there are strong
growth prospects and where we can leverage our core silicon timing
technologies. Just as we targeted the PC industry in the early 1990s, we
have identified several other high-growth markets where we can market
our silicon timing devices. These industries are being driven by the
Internet and its users' demand for speed and bandwidth. Many of our
customers are designing equipment to meet this need, and we already have
several design wins on their existing and next generation products.
. Dominate these new markets by developing multiple application specific
products to meet the needs of our customers and create a leading market
position. Many of our customers require unique or customized timing
solutions for their products. Over the last three years, we have
introduced more than 424 new products, and we continue to leverage our
extensive library of designs and key process patents to meet these
needs.
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. Maintain design leadership in core silicon timing technologies through
our exclusive design library, patents on core technologies and
significant investments in research and development. We believe that our
strong market share is a function of our ability to continue to produce
new designs within short time-to-market requirements. We have led the
industry with many technical designs, including delivering one of the
first silicon timing device for the Intel(R) Pentium(R) processor in
1993 and the Digital Alpha microprocessor in 1994. We are currently
involved in the design of new and existing products for applications
which only recently began using silicon timing devices, such as Internet
access equipment (e.g., cable and ADSL modems), Internet backbone
equipment (e.g., switches, routers and framers) and network systems
(e.g., servers and storage devices). We are also involved in the next
generation of our long-standing existing product portfolio for consumer
and business electronics such as PCs and digital set-top boxes.
. Expand into new timing markets through select acquisitions of technology
and recruitment of personnel that complement our existing expertise. In
1997, we acquired Microclock, which allowed us to expand our silicon
timing product portfolio outside the PC market. In 1999, we recruited a
group of engineers for our Arizona design facility, which allowed us to
penetrate several communications companies with our reference designs.
We will continue to make similar investments when they can be done cost
effectively and are consistent with our overall business strategy.
Product Overview
Silicon Timing Devices. Our silicon timing devices product group represents
our core business. We supply a broad line of products for use in the consumer
and business electronics industries and increasingly supply products for the
communications equipment industry. These silicon timing devices control
multiple processes by providing and synchronizing the timing of the computer
system, including signals from the microprocessor, video screen, graphics
controller, memory, keyboard, disk drives and communication ports.
Individual silicon timing products are used in a variety of application
markets, including: (1) computing systems, such as PCs, workstations, Internet
appliances, disk drives and printers; (2) digital multimedia electronics, such
as set-top boxes, DVDs, digital cameras and game machines; (3) Internet
backbone equipment, such as switches, routers and framers; (4) Internet access
equipment, such as cable and ADSL modems; and (5) network systems, such as
servers and storage devices. The timing requirements of these products have
traditionally been served by crystal oscillators. Crystal oscillators are
components manufactured from quartz that resonate at a single set frequency. In
situations where a single silicon timing device can replace multiple crystal
oscillators, silicon timing devices have emerged as both more cost-effective
and technologically superior solutions to the crystal-based standard. We view
the $2.4 billion crystal-based oscillator market as a future growth
opportunity, as our silicon timing device products provide viable alternatives
to the present crystal-based standard. Several application segments are leading
the conversion from crystal oscillators to silicon timing devices, including
set-top boxes, complex communications equipment and mass storage systems.
Custom Mixed-Signal and Data Communications. This product group represents
our non-core business. Our custom mixed-signal (analog and digital) integrated
circuit products are customized to the specific requirements of a broad range
of customers and applications. Custom mixed-signal products are used in
medical, consumer and industrial applications such as glucose measurement
devices, hearing aids, burglar alarm systems and caller ID boxes. These
products are typically sold through development and product contracts of five
years or more, which generally provide a minimum purchase commitment by the
customer.
Our data communications product group includes a portfolio of transceiver
integrated circuits that transmit and receive electronic data between various
PC systems. Our transceivers are utilized in a wide variety of networking
protocols, including Fast Ethernet, Asynchronous Transfer Mode and SONET
applications. Our flagship product, the ICS1890, was the industry's first
single-chip integrated circuit transceiver for the Fast Ethernet protocol.
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On February 18, 1999, we sold certain intellectual property and equipment of
our non-core data communications product group to 3Com Corporation for $16.0
million in cash. We decided to reduce our ongoing investment in this product
group in order to focus on our core silicon timing product group.
The sale of certain assets of our non-core product group benefits us by
permanently eliminating certain fixed costs associated with research and
development while at the same time allowing us to retain the right to sell
certain of our existing transceiver products over their remaining product life
cycles. While revenue from this product group will eventually decline over the
next few years, the sale allows us to optimize this product group's cost
structure and profit contribution while these products continue to be sold.
We believe our core product groups will continue to experience stronger
growth and higher margins, as well as represent a more favorable risk profile
than our non-core product group. Most importantly, we believe we have several
competitive advantages in our core product groups which will enable us to
sustain our leadership positions in these relevant markets.
Manufacturing Relationships
We qualify and utilize third-party suppliers for the manufacture of silicon
wafers. All of our wafers currently are manufactured by outside suppliers, two
of which supply the substantial majority of our wafers. These manufactured
wafers are packaged at two primary assemblers. We agree with our suppliers on
production schedules based on order backlog and demand forecasts for the
approaching three month period.
Top Suppliers
<TABLE>
<CAPTION>
Length of
Relationship
------------
<S> <C>
Wafer Fabs:
Chartered Semiconductor......................................... 5 years
United Microelectronics Corporation............................. 13 years
Assemblers:
Amkor/Anam International........................................ 18 years
AMT............................................................. 9 years
Orient Semiconductor............................................ 5 years
ChipPAC......................................................... 1 year
</TABLE>
During the fourth quarter of fiscal year 1997, we set up a test and drop-
ship facility in Singapore's Kolam Ayer Industrial Park to achieve faster
delivery of our products to customers throughout the Pacific Rim region. The
Singapore facility handles wafer probe and final testing for over 95% of our
silicon timing products. The facility began testing devices in the first
quarter of fiscal year 1998 and shipments began in the second quarter of fiscal
year 1998.
Sales Support and Customers
We market our products through a direct sales force that manages a worldwide
network of independent sales representatives and distributors. We direct our
sales efforts through our offices in Norristown (PA), San Jose (CA), Houston
(TX) and Taipei (Taiwan).
We believe that our customers' purchase decisions are based on performance,
time-to-market, service and cost. Many customers have long relationships with
us based on our success in meeting these criteria. We believe that our ability
to rapidly respond to changes in demand for new or modified designs with
consistent high quality is a major factor in our success at sustaining customer
relationships. Reflecting these strong relationships, we are currently in the
process of developing the next generation of timing devices to support the
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leading systems architects in personal computing and Internet services, as well
as the communications broadband technologies.
We currently have more than 400 customers, with no single customer
accounting for 10% or more of our revenue in the fiscal year ended July 3, 1999
other than Maxtek Technology, which accounted for 12% of our fiscal year 1999
total revenue. We do not consider Maxtek Technology a single customer because
they purchase our products to distribute to numerous OEMs.
Top OEM Customers in Each Product Area
<TABLE>
<CAPTION>
Custom Mixed-
Communications Infrastructure Consumer and Business Electronics Signal and Data Communications
- ----------------------------- --------------------------------- ------------------------------
<S> <C> <C>
Cisco Asustek Hewlett Packard
Samsung Hughes Networks Xircom
Scientific
Atlanta Compaq Fujitsu
Nortel
Networks Dell Newbridge
Intergraph IBM Lucent
Hitachi Echostar Microtouch
Marconi Intel Lifescan
Hitachi E-Machines KDI
Seiko-Epson General Instrument GE
SGI Gateway Cochlear
</TABLE>
Research and Development
The design process for our products is extremely complex, involving the
development of a prototype through computer-aided design, the use of simulation
methodology, the generation of photo masks for the manufacturing process, the
fabrication of wafers and the characterization of the prototype on test systems
before submission to customers for qualification. Research and development
efforts concentrate on the design and development of new leading-edge products
for our markets and the continual enhancement of our design capabilities.
Over the last three fiscal years, we have developed and introduced to market
approximately 424 new products. For over twenty years, we have developed
libraries of proprietary mixed-signal integrated circuit designs and have
invested in extensive computer-aided design and engineering resources
specifically designed to support the increasing complexity and customized
nature of FTGs and silicon timing devices. Investments in research and
development were approximately $13.5 million, $19.8 million and $21.3 million
in fiscal years 1997, 1998 and 1999, respectively. Such expenses typically
include costs for engineering personnel, prototype and wafer mask costs, and
investment in design tools and support overhead related to new and existing
product development. As of April 1, 2000, our research and development staff
comprised 86 people. We will continue to invest in research and new product
development within our core product group. We believe our ability to
consistently develop and market new generations of silicon timing devices has
become a key competitive advantage and has contributed significantly to our
leading market share.
Patents/Trademarks
We hold several patents, as well as copyrights, mask works and trademarks
with respect to our various products and expect to continue to file
applications for additional intellectual property rights in the future as a
means of protecting our technology and market position. These patents generally
have a 17-year life and begin expiring in fiscal year 2009. In addition, we
seek to protect our proprietary information and know-how through the use of
trade secrets, confidentiality agreements and other security measures. To
augment product feature sets or accelerate development schedules, we also
license certain technologies. We do not consider any single patent or license
to be material to our business. In certain instances, we have performed design
services for
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OEM customers pursuant to an agreement by which we provide certain of our
intellectual property rights with the final product to our customers. Such
transfers are also not deemed material to our business. See "Risk Factors--We
Depend on Patents, Trade Secrets and Proprietary Technology."
Employees
As of April 1, 2000, we had 258 full-time employees, 86 of whom were engaged
in research and development, 25 in sales, 17 in marketing and technical
support, 36 in finance and administration and 94 in manufacturing support and
operations. We have incentive programs to retain our key research and
development staff. After this offering, the senior management team and many
other employees will own new common stock and options, together representing up
to approximately 18% of our common stock on a fully-diluted basis.
Facilities
Our corporate headquarters, covering 61,000 square feet, is located in
Norristown, Pennsylvania. We purchased this property in September 1992. On
January 18, 1999, we entered into an agreement of sale with BET Investments
III, L.P. to sell the land and property of our Norristown location for $5.5
million. The sale transaction was completed on April 13, 1999. On January 29,
1999, we signed a lease with BET Investments IV, L.P., the assignee of BET
Investments III, L.P., to lease back the Norristown building for a term of
eight years commencing upon the closing of the sale, with monthly rent
beginning at approximately $51,000 for the first year and progressively
increasing each year to approximately $63,000 in the eighth year. We also have
a renewal option of three or more years after the initial eight-year term.
We opened a 10,000 square foot design facility in Tempe, Arizona in January
2000. The lease term for this facility is five years with annual lease payments
of $111,600, increasing $2,400 each year during the term of the lease.
We utilize a sales office located in Taipei, Taiwan, which consists of 1,300
square feet of office space leased pursuant to an agreement which expires in
November 2000. We also utilize a facility located in Singapore for testing,
warehousing, sales and administration, which consists of 16,000 square feet of
space leased pursuant to an agreement which expires in August 2000.
In November 1998, we relocated our San Jose operations to a new facility in
San Jose with 70,000 square feet of office space pursuant to a new lease
agreement which will expire in December 2008. We believe that this new facility
is adequate to meet our requirements going forward.
Legal Proceedings
From time to time, various inquiries, potential claims and charges and
litigation are made, asserted or commenced by or against us, principally
arising from or related to contractual relations and possible patent
infringement. We believe that any of these claims currently pending,
individually and in the aggregate, have been adequately reserved and will not
have any material adverse effect on our consolidated financial position or
results of operations, although no assurance can be made in this regard.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information about our directors and
the executive officers.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Chief Executive Officer, President and
Hock E. Tan.......................... 49 Director
Vice President and Chief Financial
Justine F. Lien...................... 37 Officer
Lewis C. Eggebrecht.................. 56 Vice President and Chief Scientist
Henry I. Boreen...................... 73 Director
David Dominik........................ 44 Director
Michael A. Krupka.................... 35 Director
Prescott Ashe........................ 33 Director
John Howard.......................... 48 Director
</TABLE>
Hock E. Tan began serving as Chief Executive Officer and President after the
recapitalization in May 11, 1999. Mr. Tan joined us in August 1994 and was
appointed as Senior Vice President and Chief Financial Officer in February
1995. In April 1996, Mr. Tan was appointed to the additional post of Chief
Operating Officer. Before joining our company, Mr. Tan was Vice President of
Finance of Commodore International, Ltd. from 1992 to 1994. Mr. Tan has served
as Managing Director of Pacven Investment, Ltd. from 1988 to 1992 and was
Managing Director of Hume Industries (M) Ltd. from 1983 to 1988. His career
also includes senior financial positions with PepsiCo, Inc. and General Motors
Corporation. Mr. Tan holds an M.B.A. from Harvard Business School and an M.S.
in Mechanical Engineering from Massachusetts Institute of Technology.
Justine F. Lien was appointed Chief Financial Officer after the
recapitalization on May 11, 1999 and has been with us since 1993. She has held
titles including Director of Finance and Administration and Assistant
Treasurer. Prior to joining us, Ms. Lien was employed by Smith Industries in
various finance capacities. Ms. Lien holds a B.A. degree in Accounting and
Economics from Immaculata College and is a Certified Management Accountant.
Lewis C. Eggebrecht was appointed Vice President and Chief Scientist in 1998
and possesses over 30 years of experience in the integrated circuit and
personal computer industries. Prior to his employment with us, Mr. Eggebrecht
was Chief Architect for the Multimedia Products Group at Philips Semiconductor
from 1996 to 1998. Mr. Eggebrecht was a senior engineer at S3 in 1996 and was a
Vice President and Chief Scientist at our company from 1994 to 1996. Mr.
Eggebrecht also held senior engineering positions at Commodore International,
Franklin Computer and IBM. Mr. Eggebrecht holds numerous patents and industry
awards and has authored over 25 articles for a variety of technical
publications. Mr. Eggebrecht holds a B.S.E.E. degree from the Michigan
Technological University and has accomplished advanced degree work at the
University of Minnesota.
Henry I. Boreen has been a director since December 1984 and chairman of the
board of directors since April 1995. He served as Interim Chief Executive
officer from March 1998 through October 1998. Since 1984, Mr. Boreen has been a
principal of HIB International. From 1989 to January 1998, Mr. Boreen has also
served as chairman of AM Communications, Inc., a manufacturer of
telecommunications equipment. Mr. Boreen has over 35 years of experience in the
integrated circuits industry and was the founder and chairman of Solid State
Scientific, a semiconductor manufacturer.
David Dominik is a co-founder and managing director of Convergence Capital
Group and a special limited partner of Bain Capital, Inc. He was a managing
director of Bain Capital, Inc. from 1990 until March 2000. Previously, Mr.
Dominik was a general partner of Zero Stage Capital, a venture capital firm
focused on early-stage companies, and assistant to the chairman of Genzyme
Corporation, a biotechnology firm. From 1982 to 1984, he worked as a management
consultant at Bain & Company. Mr. Dominik also serves as a director of ChipPAC,
Inc., DDi Corp. and OneSource.
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<PAGE>
Michael A. Krupka joined Bain Capital in 1991 and has been a Managing
Director since 1997. Prior to joining Bain Capital, Mr. Krupka spent several
years as a management consultant at Bain & Company where he focused on
technology and technology-related companies. In addition, he has served in
several senior operating roles at Bain Capital portfolio companies. Mr. Krupka
currently serves on the board of directors of Sealy Corporation.
Prescott Ashe is a co-founder and managing director of Convergence Capital
Group. He was a principal at Bain Capital, Inc. from June 1998 until March
2000. He was an associate at Bain Capital, Inc. from 1992 until 1998. Prior to
that, he was an analyst at Bain Capital, Inc. and a consultant at Bain &
Company. Mr. Ashe also serves as a director of ChipPAC, Inc., DDi Corp. and
SMTC Corporation.
John D. Howard joined Bear Stearns in March of 1997 to develop and build its
Merchant Banking business. He is a Senior Managing Director of Bear Stearns and
Head of Merchant Banking. Prior to joining Bear Stearns, Mr. Howard founded
Gryphon Capital Partners, a private investment firm. From 1990 to 1996, he was
co-Chief Executive Officer of Vestar Capital Partners, Inc., a private
investment firm specializing in management buyouts. In addition, Mr. Howard was
a Senior Vice President and partner of Wesray Capital Corporation, one of the
foremost private equity sponsors and a pioneer of leveraged buyouts, from 1985
to 1990. Formerly, Mr. Howard was a Vice President in the mergers and
acquisitions group of Bear Stearns.
Upon completion of the offering, we expect to appoint at least one
additional independent director.
Compensation of Directors
Directors serving on the board of directors are currently not entitled to
receive any compensation for serving on the board. Directors are reimbursed for
their out-of-pocket expenses incurred in connection with such services.
Following this offering, directors who are not employees of our company or who
are not otherwise affiliated with us or our principal shareholders will receive
compensation that is commensurate with arrangements offered to directors of
companies that are similar to our company. Compensation arrangements for
independent directors established by our board could be in the form of cash
payments and/or option grants.
48
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth, for the fiscal years ended July 3, 1999,
June 27, 1998 and June 28, 1997, the compensation paid to those persons who
were, at any time during fiscal year 1999, our chief executive officer and our
next most highly compensated executive officers whose total annual salary and
bonus was in excess of $100,000 for fiscal year 1999.
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------
Annual Compensation Securities
---------------------- Underlying All Other
Fiscal Salary Bonus Options/SARS Compensation
Year ($) ($)(1) (#) ($)(2)
------ ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Hock E. Tan(3)............... 1999 232,565 70,560 1,195,206 107,340
Chief Executive Officer and
President 1998 209,997 168,000 -- 5,254
(since May 1999) 1997 166,273 112,660 84,710 5,182
Justine F. Lien(4)........... 1999 103,931 39,403 525,202 45,457
Chief Financial Officer 1998 89,803 38,610 6,777 5,158
(since May 1999) 1997 84,437 26,052 31,766 6,271
Lewis C. Eggebrecht.......... 1999 180,560 80,490 677,680 64,214
Vice President and Chief
Scientist 1998 78,923 84,857 169,420 454
Henry I. Boreen(5)........... 1999 72,262 26,880 64,380 364
Chief Executive Officer 1998 66,923 -- 98,264 --
(May 1998--November 1998) 1997 96,923 40,020 127,065 --
Rudolf S. Gassner(6)......... 1999 74,031 -- 359,170 14,788
Chairman of the Board
(January 1999--May 1999)
</TABLE>
- --------
(1) Includes cash bonuses for services rendered in the applicable fiscal year.
(2) Includes amounts contributed by the Company (i) under the Company's 401(k)
Plan as follows: Mr. Tan--$4,750 for 1999, $4,750 for 1998 and $4,750 for
1997; Mr. Eggebrecht--$3,821 for 1999 and $0 for 1998; and Ms. Lien--$5,245
in 1999, $4,931 in 1998 and $6,057 in 1997; (ii) for premiums for a life
insurance policy as follows: Mr. Tan--$504 for 1999, $504 for 1998, and
$432 for 1997; Mr. Eggebrecht--$454 for 1999 and $454 for 1998; and Ms.
Lien--$252 for 1999, $227 for 1998 and $214 for 1997; (iii) for deferred
compensation agreements as follows: Mr. Tan--$102,086 for 1999 and Mr.
Eggebrecht--$59,940 for 1999; (iv) for car allowance for Mr. Gassner--
$7,938; and (v) for lawyer fees for Mr. Gassner--$6,850.
(3) Mr. Tan was appointed Chief Executive Officer and President at the close of
the recapitalization on May 11, 1999.
(4) Ms. Lien was appointed Chief Financial Officer effective May 11, 1999.
(5) Mr. Boreen resigned as Chief Executive Officer effective December 31, 1998.
(6) Effective January 1999, Mr. Gassner was elected chairman of the board of
directors and assigned the responsibilities of chief executive officer. Mr.
Gassner's employment terminated pursuant to the terms of his employment
agreement at the close of the recapitalization on May 11, 1999.
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<PAGE>
The following table sets forth the option grants during the fiscal year
ended July 3, 1999 for the individuals named in the Summary Compensation table
after giving effect to the reclassification and the 1.6942-for-1 stock split,
assuming an offering price of $16.00 per share and an effective date of May 22,
2000.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed Annual
Individual Grants Rates of Stock
- ----------------------------------------------------------------------------- Price
% of Total Appreciation
Options Exercise Grant for Option
Granted to or Base Date Term
Options Employees in Price Market Expiration --------------
Name Granted Fiscal Year ($/SH) Price($) Date 5%($) 10%($)
---- --------- ------------ -------- -------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Hock E. Tan............. 389,534(1) 3.3% 0.0260 0.1299 05/11/09 72,278 121,082
43,282(1) 0.4% 2.1249 10.6243 05/11/09 57,839 146,575
508,260(2) 4.3% 0.1299 0.1299 05/11/09 41,507 105,187
254,130(2) 2.2% 1.7530 0.1299 05/11/09 -- --
Justine F. Lien......... 152,478(1) 1.3% 0.0260 0.1299 05/11/09 28,292 47,396
16,942(1) 0.1% 2.1249 10.6243 05/11/09 22,640 57,375
225,893(2) 1.9% 0.1299 0.1299 05/11/09 18,448 46,750
112,947(2) 1.0% 1.7530 0.1299 05/11/09 -- --
16,942(3) 0.1% 7.4886 7.4886 08/03/03 -- --
Lewis C. Eggebrecht..... 228,717(1) 2.0% 0.0260 0.1299 05/11/09 42,438 71,094
25,413(1) 0.2% 2.1249 10.6243 05/11/09 33,960 86,062
33,884(3) 0.3% 7.4886 7.4886 08/03/03 -- --
282,367(2) 2.4% 0.1299 0.1299 05/11/09 23,060 58,437
141,183(2) 1.2% 1.7530 0.1299 05/11/09 -- --
Henry I. Boreen......... 50,826(3) 0.4% 5.8655 5.8655 09/11/03 -- --
13,554(3) 0.1% 10.8456 10.8456 02/02/04 -- --
Rudolf S. Gassner....... 359,170(3) 3.1% 8.1896 8.1896 11/03/03 -- --
</TABLE>
- ---------------------
(1) In-the-money options granted in exchange for the rollover of options
outstanding at the time of the recapitalization.
(2) Granted under the Company's 1999 Stock Option Plan. Grants under the 1999
Stock Option Plan may not be comparable to previous plans due to the
recapitalization of the Company.
(3) Granted under the Company's 1997 Equity Compensation Plan. In connection
with the recapitalization we paid the holders the following amounts with
respect to the cancellation of such options: Mr. Eggebrecht--$171,250; Mr.
Boreen--$362,375; and Mr. Gassner--$1,297,248.
50
<PAGE>
The following table sets forth information concerning stock option exercises
during our last year and options outstanding at the end of the last year after
giving effect to the reclassification and the 1.6942-for-1 stock split,
assuming an offering price of $16.00 per share and an effective date of May 22,
2000.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of
Securities
Underlying
Unexercised Value of Unexercised
Options at In-the-Money
Fiscal Year End Options at
(#) FY-End ($)
Shares Value --------------- --------------------
Acquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
---- ------------ ---------- --------------- --------------------
<S> <C> <C> <C> <C>
Hock E. Tan............. 169,420 $1,021,875 389,534/762,390 6,822,958/11,686,727
Justine F. Lien......... 54,743 $ 281,039 169,420/338,840 2,663,818/5,194,100
Lewis C. Eggebrecht..... 76,239 $ 341,563 254,130/423,550 4,006,133/6,492,627
Henry I. Boreen......... 149,090 $ 621,750 0/0 0/0
Rudolf S. Gassner....... 398,137 $1,726,625 0/0 0/0
</TABLE>
Executive Employment and Severance Arrangements
As a part of the recapitalization, we entered into an employment agreement
with Hock E. Tan, as CEO and President with a base salary of $250,000 per year.
In addition to his salary, Mr. Tan is eligible to earn an annual bonus of up to
120% of his base salary based upon our attaining certain performance targets
established annually by the board of directors. During his term of employment,
Bain Capital has agreed to nominate and vote for Mr. Tan to serve as a member
of the board of directors.
Qualified 401(k) and Profit Sharing Plan
We maintain a qualified 401(k) and profit sharing plan. Employees are
permitted to contribute up to 12% of their annual compensation. Under the plan,
we make matching contributions equal to 150% of the first 1% contributed, 125%
of the second 1% contributed, 100% of the third 1% contributed, 75% of the
fourth 1% contributed and 50% of the next 2% contributed up to a maximum of 6%
of annual compensation, subject to the IRS limits. The amounts we contributed
and charged to expense were $0.5 million in both fiscal years 1999 and 1998 and
$0.3 million in fiscal year 1997.
Deferred Compensation Arrangements
As part of the recapitalization, we entered into deferred compensation
arrangements with certain members of our senior management team. The
arrangements expire on May 11, 2009, at which time we will pay the executives
the entire deferred compensation amount regardless of their employment status
at our company. If a sale of our company occurs prior to the expiration of the
arrangements, the executives will receive the full benefit amount at that date.
On the date of this offering, the executives will receive 50% of the benefit
under these arrangements, and the remaining 50% will be paid on the first
anniversary of this offering. The amount of deferred compensation as of April
1, 2000 was $0.5 million.
Management Equity Participation
The Recapitalization. Some of the shares of our existing common stock held
by some members of management before the recapitalization were converted into
shares of our new common stock after the recapitalization. In addition, some of
the existing stock options held by some of the members of our
51
<PAGE>
management before the recapitalization were converted into options to purchase
shares of our new common stock after the recapitalization and deferred
compensation agreements. Fifteen members of management participated in the
rollover of common stock and stock options, including Messrs. Henry I. Boreen,
Hock E. Tan and Lewis C. Eggebrecht. These members of management invested an
aggregate of $9.8 million in the recapitalization, consisting primarily of the
fair value of certain common stock and vested stock options.
1999 Stock Option Plans. In order to provide additional financial incentives
to certain of our executives and other key employees, in May 1999 we adopted
the 1999 Stock Option Plan, or the "1999 Plan" under which we will periodically
grant options to purchase our new common stock. These options will vest upon
the fulfillment of certain conditions, the passage of a specified period of
time and our achievement of certain performance goals, as determined by our
board of directors. All of the unvested options of any terminated employee will
expire upon termination, and the exercise period of all vested options will be
reduced to sixty days following the date of termination. We and certain
investors have the right to repurchase shares of our common stock issued upon
the exercise of options granted under the 1999 Plan if any employee ceases to
be employed by us. Following this offering, the senior management team and many
other employees will own common stock and options, together representing
approximately 18% of our common stock on a fully-diluted basis. No future
grants will be made under the 1999 Plan upon the effectiveness of the 2000
Plan.
2000 Long-Term Equity Incentive Plan. Prior to the closing of the offering,
we will adopt the 2000 Long-Term Equity Incentive Plan. The equity incentive
plan provides for grants of stock options, stock appreciation rights,
restricted stock and performance awards. Directors, officers and other
employees of our company and its subsidiaries and persons who engage in
services for us are eligible for grants under the plan. The purpose of the
equity incentive plan is to provide these individuals with incentives to
maximize shareholder value and otherwise contribute to our success and to
enable us to attract, retain and reward the best available persons for
positions of responsibility.
Approximately 6,300,000 shares of common stock after this offering will be
available for issuance under the equity incentive plan, subject to adjustment
in the event of a reorganization, stock split, merger or similar change in our
corporate structure or the outstanding shares of common stock. In the event of
any of these occurrences, we may make any adjustments we consider appropriate
to, among other things, the number and kind of shares, options or other
property available for issuance under the equity incentive plan or covered by
grants previously made under the plan. The shares available for issuance under
the equity incentive plan may be, in whole or in part, authorized and unissued
or held as treasury shares.
The compensation committee of our board of directors will administer the
equity incentive plan. Our board also has the authority to administer the plan
and to take all actions that the compensation committee is otherwise authorized
to take under the plan.
The following is a summary of the material terms of the equity incentive
plan, but does not include all of the provisions of the plan. For further
information about the plan, we refer you to the equity incentive plan, which we
have filed as an exhibit to the registration statement of which this prospectus
is a part.
Directors, officers and employees of our company and its subsidiaries, as
well as other individuals performing significant services for us, or to whom we
have extended an offer of employment, will be eligible to receive grants under
the equity incentive plan. However, only employees may receive grants of
incentive stock options. In each case, the compensation committee will select
the actual grantees. As of April 1, 2000, there were approximately 190
employees expected to be eligible to participate in the equity incentive plan.
Under the equity incentive plan, the compensation committee or the board may
award grants of incentive stock options conforming to the provisions of Section
422 of the Internal Revenue Code of 1986, as amended,
52
<PAGE>
or the "Internal Revenue Code," and other, non-qualified stock options. The
compensation committee may not, however, award to any one person in any
calendar year options to purchase common stock equal to more than 10% of the
total number of shares authorized under the plan, and it may not award
incentive options first exercisable in any calendar year whose underlying
shares have a fair market value greater than $100,000, determined at the time
of grant.
The compensation committee will determine the exercise price of any option
in its discretion. However, the exercise price of an incentive option may not
be less than 100% of the fair market value of a share of common stock on the
date of grant, and the exercise price of an incentive option awarded to a
person who owns stock constituting more than 10% of our company's voting power
may not be less than 110% of such fair market value on such date.
Unless the compensation committee determines otherwise, the exercise price
of any option may be paid in any of the following ways:
. in cash,
. by delivery of shares of common stock with a fair market value equal to
the exercise price,
. by simultaneous sale through a broker of shares of common stock acquired
upon exercise, and/or
. by having us withhold shares of common stock otherwise issuable upon
exercise.
If a participant elects to deliver or withhold shares of common stock in
payment of any part of an option's exercise price, the compensation committee
may in its discretion grant the participant a "reload option." The reload
option entitles its holder to purchase a number of shares of common stock equal
to the number so delivered or withheld. The reload option may also include, if
the compensation committee chooses, the right to purchase a number of shares of
common stock equal to the number delivered or withheld in satisfaction of any
tax withholding requirements of our company in connection with the exercise of
the original option. The terms of each reload option will be the same as those
of the original exercised option, except that the grant date will be the date
of exercise of the original option, and the exercise price will be the fair
market value of the common stock on the date of exercise.
The compensation committee will determine the term of each option in its
discretion. However, no term may exceed ten years from the date of grant or, in
the case of an incentive option granted to a person who owns stock constituting
more than 10% of the voting power of our company, five years from the date of
grant. In addition, all options under the equity incentive plan, whether or not
then exercisable, generally cease vesting when a grantee ceases to be a
director, officer or employee of, or to otherwise perform services for, our
company or its subsidiaries. Options generally expire 30 days after the date of
cessation of service, so long as the grantee does not compete with us during
the 30-day period.
In the event of death, disability or retirement, a grantee's vested options
will remain exercisable for up to 90 days after the date of retirement, while
his or her unvested options may become fully vested and exercisable in the
discretion of the compensation committee. Upon termination for cause, all
options will terminate immediately. And if there is a change in control of our
company and a grantee is terminated from service with our company and its
subsidiaries within one year thereafter, all options will become fully vested
and exercisable and remain so for up to one year after the date of termination.
In addition, the compensation committee has the authority to grant options that
will become fully vested and exercisable automatically upon a change in control
of our company, whether or not the grantee is subsequently terminated.
The compensation committee may grant stock appreciation rights, or SARs,
alone or in tandem with stock options, subject to the terms and conditions it
determines under the equity incentive plan. SARs granted in
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<PAGE>
tandem with options become exercisable only when, to the extent and on the
conditions that the related options are exercisable, and they expire at the
same time the related options expire. The exercise of an option results in the
immediate forfeiture of any related SAR to the extent the option is exercised,
and the exercise of an SAR results in the immediate forfeiture of any related
option to the extent the SAR is exercised.
Upon exercise of an SAR, the grantee will receive an amount in cash and/or
shares of common stock or other securities equal to the difference between the
fair market value of a share of common stock on the date of exercise and the
exercise price of the SAR or, in the case of an SAR granted in tandem with
options, of the option to which the SAR relates, multiplied by the number of
shares as to which the SAR is exercised.
Under the equity incentive plan, the compensation committee may award
restricted stock subject to the conditions and restrictions, and for the
duration, which will generally be at least six months, that it determines in
its discretion. A grantee will be required to pay to us at least the aggregate
par value of any shares of restricted stock within ten days of the date of
grant, unless the shares are treasury shares. Unless the compensation committee
determines otherwise, upon death, disability or termination of employment or
service, all of a grantee's restricted stock as to which the applicable
restrictions have not lapsed will be forfeited immediately.
Under the equity incentive plan, the compensation committee may grant
performance awards contingent upon achievement by the grantee, our company
and/or its subsidiaries or divisions of set goals and objectives regarding
specified performance criteria, such as return on equity, over a specified
performance cycle, as designated by the compensation committee. Performance
awards may include specific dollar-value target awards, performance units, the
value of which is established by the compensation committee at the time of
grant, and/or performance shares, the value of which is equal to the fair
market value of a share of common stock on the date of grant. The value of a
performance award may be fixed or fluctuate on the basis of specified
performance criteria. A performance award may be paid out in cash and/or shares
of common stock or other securities.
Unless the compensation committee determines otherwise, if a grantee ceases
to be a director, officer or employee of, or to otherwise perform services for,
our company and its subsidiaries prior to completion of a performance cycle,
because of termination within one year after a change in control of our company
or due to death, disability or retirement, the grantee will receive the portion
of the performance award payable to him or her based on achievement of the
applicable performance criteria over the elapsed portion of the performance
cycle. If termination of employment or service occurs for any other reason
prior to completion of a performance cycle, the grantee will become ineligible
to receive any portion of a performance award.
The terms and conditions of each award made under the equity incentive plan,
including vesting requirements, will be set forth consistent with the plan in a
written agreement with the grantee. Except in limited circumstances, no award
under the equity incentive plan may vest and become exercisable within six
months of the date of grant, unless the compensation committee determines
otherwise.
Unless the compensation committee determines otherwise, a participant may
elect to deliver shares of common stock, or to have us withhold shares of
common stock otherwise issuable upon exercise of an option or SAR or upon grant
or vesting of restricted stock, in order to satisfy our withholding obligations
in connection with any such exercise, grant or vesting.
Unless the compensation committee determines otherwise, no award made under
the equity incentive plan will be transferable other than by will or the laws
of descent and distribution or to a grantee's family member
54
<PAGE>
by gift or a qualified domestic relations order, and each award may be
exercised only by the grantee, his or her qualified family member transferee,
or his or her executor, administrator, guardian, or legal representative.
The board may amend or terminate the equity incentive plan in its
discretion, except that no amendment will become effective without prior
approval of our shareholders if such approval is necessary for continued
compliance with the performance-based compensation exception of Section 162(m)
of the Internal Revenue Code or any stock exchange listing requirements.
Furthermore, any termination may not materially and adversely affect any
outstanding rights or obligations under the equity incentive plan without the
affected participant's consent. If not previously terminated by the board, the
equity incentive plan will terminate on the tenth anniversary of its adoption.
The Revenue Reconciliation Act of 1993 limits the annual deduction a
publicly held company may take for compensation paid to its chief executive
officer or any of its four other highest compensated officers in excess of
$1,000,000 per year, excluding for this purpose compensation that is
"performance-based" within the meaning of Internal Revenue Code Section 162(m).
We intend that compensation realized upon the exercise of an option or SAR
granted under the plan be regarded as "performance-based" under Section 162(m)
and that such compensation be deductible without regard to the limits imposed
by Section 162(m) on compensation that is not "performance-based."
Compensation paid under the equity incentive plan will not qualify as
performance-based except to the extent paid pursuant to grants made under the
plan following the approval of the plan by our shareholders in accordance with
Internal Revenue Code Section 162(m)(4)(c) and the related Treasury
Regulations, and except to the extent that certain other requirements are
satisfied. However, based on a special rule contained in regulations issued
under Section 162(m), the $1 million deduction limitation described above
should not apply to any options, SARs or restricted stock granted, or cash-
based compensation paid, under the equity incentive plan prior to our annual
meeting of shareholders in the calendar year following the close of the third
year calendar year after this offering.
Employee Stock Purchase Plan. The 2000 Employee Stock Purchase Plan, or the
"Stock Purchase Plan," will be adopted by our board of directors and our
shareholders prior to the completion of this offering. The Stock Purchase Plan
will be established to give employees desiring to do so a convenient means of
purchasing shares of common stock through payroll deductions or lump sum cash
payments. The Stock Purchase Plan provides an incentive to participate by
permitting purchases at a discounted price. We believe that ownership of stock
by employees will foster greater employee interest in the success, growth and
development of our Company.
Compensation Committee Interlocks and Insider Participation
Currently, our board of directors does not have a compensation committee.
Consequently, the entire board of directors participates in deliberations
concerning executive officer compensation. Mr. Tan is a member of the board of
directors and is our President and Chief Executive Officer. Mr. Boreen is a
member of the board of directors and is a former officer of the Company. Mr.
Gassner was a member of the board of directors and an officer of the Company
prior to the recapitalization.
On May 11, 1999, we entered into a consulting agreement with Henry Boreen, a
board member, for consulting services. The agreement provides for us to pay Mr.
Boreen $350,000 per year in monthly installments. This consulting agreement
will be terminated by mutual consent of the parties in connection with this
offering, and we will use some of the proceeds of this offering to pay Mr.
Boreen a fee of $350,000.
Committees of the Board of Directors
Upon the closing of this offering, the board of directors will have an audit
committee and a compensation committee. The audit committee will report to the
board regarding the appointment of our independent public
55
<PAGE>
accountants, the scope and results of our annual audits, compliance with our
accounting and financial policies and management's procedures and policies
relative to the adequacy of our internal accounting controls. Upon the
completion of the initial public offering, the audit committee will consist of
a majority of directors not otherwise affiliated with us. The compensation
committee of the board of directors will review and make recommendations to the
board regarding our compensation policies and all forms of compensation to be
provided to our executive officers. In addition, the compensation committee
will review bonus and stock compensation arrangements for all of our other
employees. Upon the completion of the initial public offering, the compensation
committee will consist of at least two nonemployee directors (as defined in
Rule 16b-3 under the Exchange Act), and we expect to appoint at least one
additional independent director.
56
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information, as of May 1, 2000, regarding the
beneficial ownership of shares of the single class of common stock that will be
outstanding after the reclassification and the 1.6942-for-1 stock split,
assuming an offering price of $16.00 per share and an effective date of May 22,
2000, by each person or entity known by us to own more than 5% of any class of
outstanding voting securities, by each of our directors, named executive
officers and directors and executive officers as a group. The actual number of
shares of common stock to be issued to each holder of Class L common stock in
the reclassification is subject to change based on the changes to the initial
public offering price and the completion of this offering. See "The
Reclassification." Beneficial ownership of the securities listed in the table
has been determined in accordance with the applicable rules and regulations
promulgated under the Securities Exchange Act of 1934. Unless otherwise noted,
to our knowledge, each of the following shareholders has sole voting and
investment power as to the shares shown. Several of our shareholders have
granted the underwriters an option to purchase up to 1,875,000 shares of common
stock to cover over-allotments, if any.
<TABLE>
<CAPTION>
Shares Beneficially Owned* Shares Beneficially Owned*
Prior to the Offering After the Offering
------------------------------ ------------------------------ Shares Offered in
Name and Address Number Percent Number Percent Over-allotment
---------------- ---------------- ------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Principal Shareholders:
Bain Capital Funds(1)... 26,865,286 52.7% 26,865,286 42.3% 1,076,367
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116
Bear, Stearns & Co.
Inc.................... 8,955,097 17.6% 8,955,097 14.1% 358,789
245 Park Avenue
New York, New York 10167
Intel Corporation....... 6,082,669 11.9% 6,082,669 9.6% 243,704
2200 Mission College
Boulevard
Santa Clara, California
95052
Credit Suisse First
Boston Corporation..... 454,378 ** 454,378 ** 18,205
11 Madison Avenue
New York, New York 10010
Randolph Street
Partners............... 272,626 ** 272,626 ** 10,923
200 East Randolph Drive
Chicago, Illinois 60601
Directors and Executive
Officers:
Henry I. Boreen......... 4,168,476 8.1% 4,168,476 6.5% 167,011
Hock E. Tan(2).......... 924,791 1.8% 924,791 1.4% --
Justine F. Lien(3)...... 265,384 ** 265,384 ** --
Lewis C. Eggebrecht(4).. 376,899 ** 376,899 ** --
Michael A. Krupka(5).... 7,109,711 13.9% 7,109,711 11.2% 284,853
David Dominik(5)........ 7,109,711 13.9% 7,109,711 11.2% 284,853
Prescott Ashe(6)........ 7,109,711 13.9% 7,109,711 11.2% 284,853
John Howard(7).......... 8,955,097 17.6% 8,955,097 14.1% 358,789
Directors and executive
officers as a group
(8 persons)............ 21,800,356 41.6% 21,800,356 33.6% 810,653
</TABLE>
- -------------------
* The number of shares of common stock outstanding on May 1, 2000 after giving
effect to the reclassification and the stock-split with respect to a person
of group includes (a) shares of common stock outstanding on such date and
(b) all options that are currently exercisable or will become exercisable
within 60 days of May 1, 2000 by any such person or group.
** represents less than 1%
(1) Includes shares of common stock owned by Bain Capital Fund VI, L.P. ("Fund
VI"), BCIP Associates II ("BCIP II"), BCIP Trust Associates II ("BCIP
Trust II"), BCIP Associates II-B ("BCIP II-B"), BCIP Trust Associates II-B
("BCIP Trust II-B"), BCIP Associates II-C ("BCIP II-C" and, collectively
with BCIP II, BCIP Trust II, BCIP Trust II-B and BCIP II-B, the "BCIPs"),
and PEP Investment PTY Ltd. ("PEP"). The BCIPs, PEP and Fund VI are
collectively referred to as the "Bain Capital Funds."
(2) Includes 190,601 shares of common stock issuable upon exercise of options.
(3) Includes 84,212 shares of common stock issuable upon exercise of options.
(4) Includes 105,889 shares of common stock issuable upon exercise of options.
(5) Mr. Krupka is a Managing Director of Bain Capital, Inc., which is the
managing general partner of each of the BCIPs and has voting and
investment power with respect to the shares owned by PEP. In addition, (i)
Messrs. Krupka and Dominik (or affiliated entities) are general partners
of BCIP Trust II, BCIP Trust II-B, BCIP II and/or BCIP II-B, and (ii) Bain
Investors VI is a general partner of BCIP II-C. Accordingly, each of Mr.
Krupka and Mr. Dominik may be deemed to beneficially own some or all of
the shares owned by the Bain Capital Funds. Each of Mr. Krupka and
Mr. Dominik disclaims beneficial ownership of any such shares.
(6) Mr. Ashe (or an affiliated entity) is a principal of Bain Capital, Inc.
and is a general partner of BCIP Trust II, BCIP Trust II-B, BCIP II and/or
BCIP II-B. Accordingly, Mr. Ashe may be deemed to beneficially own some or
all of the shares owned by BCIP II, BCIP II-B, BCIP Trust and BCIP Trust
II-B. Mr. Ashe disclaims beneficial ownership of any shares.
(7) Mr. Howard is a Senior Managing Director of Bear Stearns. Accordingly, Mr.
Howard may be deemed to beneficially own some or all of the shares owned
by Bear, Stearns & Co. Inc. Mr. Howard disclaims beneficial ownership of
any such shares.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Recapitalization
In the recapitalization, affiliates of Bain Capital, an affiliate of Bear
Stearns and certain members of management made an aggregate equity investment
in our company of approximately $50 million as part of an agreement to redeem
and purchase all of our outstanding shares of common stock and vested options
for consideration (including fees and expenses) totaling $294.4 million.
Shareholders Agreement, Voting Agreement and Other Agreements
In connection with the recapitalization, we, each of Bain Capital and Bear
Stearns and all of our other equity holders have entered into agreements that,
among other things, provide for tag-along rights, drag-along rights,
registration rights, restrictions on the transfer of shares and certain
preemptive rights. The shareholders agreement provides that in certain
circumstances various specified actions, including among others, major
corporate transactions such as acquisitions, divestitures, financings,
recapitalizations and mergers, as well as other actions such as hiring and
firing senior managers, setting management compensation and establishing
capital and operating budgets and business plans, require the approval of a
majority of the shares of common stock held by Bain Capital. Pursuant to a
voting agreement, our board of directors is comprised of three representatives
designated by Bain Capital, one representative designated by Bear Stearns, our
chief executive officer so long as he is employed by us as chief executive
officer and Mr. Boreen so long as he owns at least 50% of the common stock he
owns at the closing of the recapitalization.
Advisory Agreements
In connection with the recapitalization, we entered into an advisory
agreement with each of Bain Capital and Bear Stearns pursuant to which they
agreed to provide financial advisory and consulting services. In exchange for
such services, Bain Capital and Bear Stearns were entitled to an aggregate
annual shareholder advisory fee of $1 million and their out-of-pocket expenses.
Each advisory agreement will be terminated by mutual consent of the parties in
connection with this offering, and we will use some of the proceeds of this
offering to pay Bain Capital and Bear Stearns a fee of $2.0 million and $0.7
million, respectively. Each advisory agreement includes customary
indemnification provisions in favor of each of Bain Capital and Bear Stearns.
During fiscal year 1999, the Company paid Bain Capital and Bear Stearns fees of
$3.4 million and $4.9 million, respectively.
Loans to Executive Officers
On May 11, 1999, certain members of the management team entered into stock
purchase agreements. In exchange for the purchase of Class A common shares and
Class L common shares, the executives delivered to us a promissory note. The
notes accrue interest at 8% per annum and mature on May 11, 2006. The
executives may prepay the notes at any time, in full or increments of $1,000.
If the executives receive a bonus from us, the executives have the obligation
to prepay their notes in an amount equal to 50% of the amount of such bonus,
net of the amount of any customary withholding taxes and such amount paid to
us. The total amount outstanding as of April 1, 2000 was $0.4 million, of which
$0.2 million was owed by Mr. Tan.
Consulting Agreement
On May 11, 1999, we entered into a consulting agreement with Henry Boreen, a
board member, for consulting services. The agreement provides for us to pay Mr.
Boreen $350,000 per year in monthly installments. The consulting agreement will
be terminated by mutual consent of the parties in connection with this
offering, and we will use some of the proceeds of this offering to pay Mr.
Boreen a fee of $350,000.
Senior Subordinated Notes and Senior Credit Facility
Sankaty High Yield Asset Partners, L.P., and Brant Point CBO 1999-1 Ltd.,
affiliates of Bain Capital, will receive a portion of the net proceeds of this
offering from the redemption and repurchase of the senior
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<PAGE>
subordinated notes and Great Point CLO 1999-1 Ltd., also an affiliate of Bain
Capital, will receive a portion of the net proceeds of the offering from the
repayment of some of our indebtedness under our senior credit facility.
Orders Placed with Affiliate of Major Shareholders
Investment funds associated with Bain Capital are also shareholders of
ChipPAC, Inc., one of our production vendors. Our orders to ChipPAC totaled
approximately $3.5 million in fiscal 2000 and were on market terms.
Interests of Experts and Underwriters
Randolph Street Partners owns 272,626 shares of common stock acquired in the
recapitalization. In connection therewith, Randolph Street Partners entered
into the stockholders agreement and is considered part of the Bain Group under
the stock agreements and the registration agreement. Some partners of Kirkland
& Ellis are partners in Randolph Street Partners. Some partners of Skadden,
Arps, Slate, Meagher and Flom LLP, counsel to the underwriters, are members in
a limited liability company that is an investor in one of the Bain Capital
funds. Kirkland & Ellis has provided legal services to our company and to Bain
Capital from time to time and expects to continue to do so in the foreseeable
future.
Bear Stearns Merchant Banking, an affiliate of Bear, Stearns & Co. Inc., one
of the underwriters of this offering, owns 8,955,097 shares of common stock
acquired in the recapitalization and will receive some of the proceeds of this
offering as a selling shareholder. An affiliate of Credit Suisse First Boston
Corporation, one of the underwriters of this offering, owns 454,378 shares of
common stock acquired in the recapitalization and will receive some of the
proceeds of this offering as a selling shareholder. Credit Suisse First Boston,
an affiliate of Credit Suisse First Boston Corporation, as a lender under our
senior credit facility, will receive a portion of the proceeds of this offering
used to repay our outstanding indebtedness under our senior credit facility.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
General Matters
Upon completion of this offering, the total amount of our authorized capital
stock will consist of 300,000,000 shares of common stock and 5,000,000 shares
of preferred stock. After giving effect to this offering, assuming an initial
public offering price of $16.00 per share, the midpoint of the range set forth
on the cover of this prospectus and a Preference Amount of $19.72 per share on
Class L common stock, we will have 63,492,905 shares of common stock and no
other shares of any series of preferred stock outstanding. As of April 1, 2000,
we had 34 shareholders of record with respect to our three classes of common
stock and one shareholder of record with respect to our Series A preferred
stock. The following summary of provisions of our capital stock describes all
material provisions of, but does not purport to be complete and is subject to,
and qualified in its entirety by, our restated certificate of incorporation and
our amended and restated by-laws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable law.
The restated certificate and by-laws contain provisions that are intended to
enhance the likelihood of continuity and stability in the composition of the
board of directors and which may have the effect of delaying, deferring or
preventing a future takeover or change in control of our company unless such
takeover or change in control is approved by our board of directors.
Common Stock
The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be,
validly issued, fully paid and nonassessable. Subject to the prior rights of
the holders of any series of preferred stock, the holders of outstanding shares
of common stock are entitled to receive dividends out of assets legally
available therefor at such time and in such amounts as the board of directors
may from time to time determine. See "Dividend Policy." The shares of common
stock are not convertible and the holders thereof have no preemptive or
subscription rights to purchase any of our securities. Upon liquidation,
dissolution or winding up of our company, the holders of common stock are
entitled to receive pro rata our assets which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of any series of preferred stock then
outstanding. Each outstanding share of common stock is entitled to one vote on
all matters submitted to a vote of shareholders. There is no cumulative voting.
Except as otherwise required by law or the restated certificate, the holders of
common stock vote together as a single class on all matters submitted to a vote
of shareholders.
The common stock will be included on the Nasdaq National Market under the
symbol "ICST."
Preferred Stock
Our board of directors may, without further action by our shareholders, from
time to time, direct the issuance of shares of preferred stock in a series and
may, at the time of issuance, determine the rights, preferences and limitations
of each series. Satisfaction of any dividend preferences of outstanding shares
of preferred stock would reduce the amount of funds available for the payment
of dividends on shares of common stock. Holders of shares of preferred stock
may be entitled to receive a preference payment in the event of any
liquidation, dissolution or winding-up of our company before any payment is
made to the holders of shares of common stock. The issuance of shares of
preferred stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a large
block of our securities or the removal of incumbent management. Upon the
affirmative vote of a majority of the total number of directors then in office,
the board of directors, without shareholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of common stock. There are no other shares of preferred
stock outstanding, and we have no present intention to issue any additional
shares of preferred stock.
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<PAGE>
Other Provisions of the Restated Articles of Incorporation and By-laws
The restated articles of incorporation provide for the board to be divided
into two classes, as nearly equal in number as possible, serving staggered
terms. Approximately one-half of the board will be elected each year. The
provision for a classified board could prevent a party who acquires control of
a majority of the outstanding voting stock from obtaining control of the board
until the second annual shareholders meeting following the date the acquiror
obtains the controlling stock interest. The classified board provision could
have the effect of discouraging a potential acquiror from making a tender offer
or otherwise attempting to obtain control of our company and could increase the
likelihood that incumbent directors will retain their positions.
The restated articles of incorporation provides that shareholder action can
be taken only at an annual or special meeting of shareholders and cannot be
taken by written consent in lieu of a meeting. The restated articles of
incorporation and the by-laws provide that, except as otherwise required by
law, special meetings of the shareholders can only be called pursuant to a
resolution adopted by a majority of the board of directors or by our chief
executive officer. Shareholders will not be permitted to call a special meeting
or to require the board to call a special meeting.
The by-laws establish an advance notice procedure for shareholder proposals
to be brought before an annual meeting of our shareholders, including proposed
nominations of persons for election to the board. Shareholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the board or by
a shareholder who was shareholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has given to our secretary
timely written notice, in proper form, of such shareholder's intention to bring
that business before the meeting. Although the by-laws do not give the board
the power to approve or disapprove shareholder nominations of candidates or
proposals regarding other business to be conducted at a special or annual
meeting, the by-laws may have the effect of precluding the conduct of business
at a meeting if the proper procedures are not followed or may discourage or
defer a potential acquiror from conducting a solicitation of proxies to elect
its own slate of directors or otherwise attempting to obtain control of our
company.
Provisions of Pennsylvania Law Governing Business Combinations
Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of
1988 prohibits, subject to certain exceptions, a "business combination" with a
shareholder or group of shareholders (and certain affiliates and associates of
such shareholders) from beneficially owning more than 20% of the voting power
of a public corporation, an "interested shareholder," for a five-year period
following the date on which the holder became an interested shareholder unless
the interested shareholder's acquisition of 20% or more of the common stock is
approved by our board of directors. This provision may discourage open market
purchases of our stock or a non-negotiated tender or exchange offer for our
stock and, accordingly, may be considered disadvantageous by a shareholder who
would desire to participate in any such transaction.
Under Section 1715 of the Pennsylvania Business Corporation Law, our
directors are not required to regard the interests of the shareholders as being
dominant or controlling in considering our best interests. The directors may
consider, to the extent they deem appropriate, such factors as:
. the effects of any action upon any group affected by such action,
including our shareholders, employees, suppliers, customers and
creditors, and communities in which we have stores, offices or other
establishments;
. our short-term and long-term interests, including benefits that may
accrue to us from our long-term plans and the possibility that these
interests may be best served by our continued independence;
. the resources, intent and conduct of any person seeking to acquire
control of us; and
. all other pertinent factors.
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<PAGE>
Section 1715 further provides that any act of our board of directors, a
committee of the board or an individual director relating to or affecting an
acquisition or potential or proposed acquisition of control to which a majority
of our disinterested directors have assented will be presumed to satisfy the
standard of care set forth in the Pennsylvania Business Corporation Law, unless
it is proven by clear and convincing evidence that our disinterested directors
did not consent to such act in good faith after reasonable investigation. As a
result of this and the other provisions of Section 1715, our directors are
provided with broad discretion with respect to actions that may be taken in
response to acquisitions or proposed acquisitions of corporate control.
Section 1715 may discourage open market purchases of our common stock or a
non-negotiated tender or exchange offer for our common stock and, accordingly,
may be considered disadvantageous by a shareholder who would desire to
participate in any such transaction. As a result, Section 1715 may have a
depressive effect on the price of our common stock.
Limitations on Liability and Indemnification of Officers and Directors
The restated articles limit the liability of directors to the fullest extent
permitted by the Pennsylvania Business Corporation Law. In addition, the
restated articles provide that we will indemnify our directors and officers to
the fullest extent permitted by such law. We expect to enter into
indemnification agreements with our current directors and executive officers
prior to the completion of the offering and expect to enter into a similar
agreement with any new directors or executive officers.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is StockTrans Inc.
DESCRIPTION OF INDEBTEDNESS
Senior Credit Facility
The senior credit facility provides for two groups of term loans: the term A
loans for $30.0 million and the term B loans for $40.0 million. The senior
credit facility also provides for revolving loans for up to $25.0 million,
including letters of credit. Subject to certain restrictions, we may use the
senior credit facility in the future for our working capital and general
corporate purposes.
In connection with this offering, we will repay all outstanding indebtedness
under our senior credit facility and terminate it. We then intend to enter into
a new revolving credit facility to support our working capital and general
corporate needs.
Senior Subordinated Notes
The senior subordinated notes were issued pursuant to an indenture, dated as
of May 11, 1999, by and between us, certain of our subsidiaries, and Chase
Manhattan Trust Company, National Association, as trustee. The senior
subordinated notes are limited in aggregate principal amount to $100,000,000
and will mature on May 15, 2009. Interest on the senior subordinated notes
accrues at the rate of 11 1/2% per annum and is payable semiannually in cash on
each May 15 and November 15, to the persons who are registered holders of the
senior subordinated notes at the close of business on the May 1 and November 1,
respectively, immediately preceding the applicable interest payment date. The
senior subordinated notes are not entitled to the benefit of any mandatory
sinking fund. The senior subordinated notes are general obligations of ours and
are subordinated in right of payment to all of our current and future senior
debt. The subordinated notes rank pari passu in right of payment with all other
senior unsecured obligations of our company.
The senior subordinated notes are redeemable, at our option, in whole at any
time or in part from time to time, on and after May 15, 2004, upon not less
than 30 nor more than 60 days' notice, at the following
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<PAGE>
redemption prices, expressed as percentages of the principal amount thereof, if
redeemed during the twelve- month period commencing on May 15 of the year set
forth below, plus, in each case, accrued interest to the date of redemption:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2004.............................. 105.750%
2005.............................. 103.833%
2006.............................. 101.916%
2007 and thereafter............... 100.000%
</TABLE>
At any time, or from time to time, on or prior to May 15, 2002, we may, at
our option, use the net cash proceeds of one or more equity offerings to redeem
up to 35% of the aggregate principal amount of senior subordinated notes
originally issued at a redemption price equal to 111.50% of the principal
amount thereof plus accrued and unpaid interest thereon, if any, to the date of
such redemption; provided that at least $65.0 million aggregate principal
amount of senior subordinated notes originally issued remains outstanding
immediately after any such redemption.
The indenture provides that, upon the occurrence of a change of control,
each holder will have the right to require that we purchase all or a portion of
such senior subordinated notes, at a purchase price equal to 101% of the
principal amount thereof plus accrued interest thereon to the date of purchase.
The term "change of control" is defined under the indenture to include one or
more of the following events:
. any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of our assets
to any person or group of related persons, together with any affiliates
thereof;
. the approval by the holders of our capital stock of any plan or proposal
for the liquidation or dissolution of our company (whether or not
otherwise in compliance with the provisions of the indenture);
. any person or group of related person, other than Bain Capital and Bear
Stearns or their respective related parties, shall become the owner,
directly or indirectly, beneficially or of record, of shares representing
more than 50% of the aggregate ordinary voting power represented by our
issued and outstanding capital stock; or
. the first day within any two-year period on which a majority of the
members of the board of directors are not continuing directors.
The following events are defined in the indenture as "events of default":
. the failure to pay interest on any senior subordinated notes and such
default continues for a period of 30 days;
. the failure to pay the principal on any senior subordinated notes;
. a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period
of 30 days after we receive written notice specifying the default;
. the failure to pay at final stated maturity the principal amount of any
of our indebtedness or any restricted subsidiary of ours and such failure
continues for a period of 10 days or more, if the aggregate principal
amount of such indebtedness, together with the principal amount of any
other such indebtedness in default for failure to pay principal at final
maturity or which has been accelerated, aggregates $7.5 million or more
at any time;
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. one or more judgments in an aggregate amount in excess of $7.5 million
shall have been rendered against us or any of our significant
subsidiaries and such judgments remain undischarged, unpaid or unstayed
for a period of 60 days after such judgment or judgments become final and
non-appealable;
. except as permitted by the indenture, any note guarantee of one of our
significant subsidiaries shall be held in any judicial proceeding to be
unenforceable, invalid, or shall cease for any reason to be in full force
and effect or any of our subsidiary guarantors shall deny or disaffirm
its obligations under its note guarantee; and
. events of bankruptcy affecting us or any of our significant subsidiaries.
The indenture contains covenants for the benefit of the holders of the
senior subordinated notes that, among other things, limit our ability and any
of our restricted subsidiaries to:
. enter into transactions with affiliates;
. pay dividends or make other restricted payments;
. consummate asset sales;
. incur indebtedness that is senior in right of payment to the senior
subordinated notes;
. incur liens;
. impose restrictions on the ability of a subsidiary to pay dividends or
make payments to us and our subsidiaries;
. merge or consolidate with any other person; or
. sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
The foregoing summary of the material provisions of our senior credit
facility and the indenture is qualified in its entirety by reference to all of
the provisions of the senior credit facility and the indenture, respectively,
previously filed with the SEC. See "Where You Can Find More Information."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there was no market for our common stock. We can
make no predictions as to the effect, if any, that sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of significant amounts of our common stock in
the public market, or the perception that such sales may occur, could adversely
affect prevailing market prices.
Sale of Restricted Shares
Upon completion of this offering, we will have, assuming an initial public
offering price of $16.00 per share, the midpoint of the range set forth on the
cover of this prospectus and a Preference Amount of $19.72 per share on Class L
common stock, 63,492,905 shares of common stock outstanding. In addition, upon
the completion of this offering, 2,011,770 shares of common stock are issuable
upon the exercise of currently exercisable outstanding stock options. Of the
shares outstanding after the offering, 12,500,000 shares of common stock, or
14,375,000 shares if the underwriters' over-allotment is exercised in full, are
freely tradeable without restriction under the Securities Act, except for any
such shares which may be held or acquired by an "affiliate" of our company, as
that term is defined in Rule 144 promulgated under the Securities Act, which
shares will be subject to the volume limitations and other restrictions of Rule
144 described below. An aggregate of 50,992,905 shares of common stock held by
our existing shareholders upon completion of the offering will be "restricted
securities," as that phrase is defined in Rule 144, and may not be resold in
the absence of registration under the Securities Act or pursuant to an
exemption from such registration, including among others, the exemptions
provided by Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, if a period of at least one year has elapsed since
the later of the date the "restricted securities" were acquired from us or the
date they were acquired from an affiliate, then the holder of such restricted
securities, including an affiliate, is entitled to sell in the public market a
number of shares within any three-month period that does not exceed the greater
of 1% of the then outstanding shares of the common stock or the average weekly
reported volume of trading of the common stock on the Nasdaq National Market
during the four calendar weeks preceding such sale. The holder may only sell
such shares through "brokers' transactions" or in transactions directly with a
"market maker," as such terms are defined in Rule 144. Sales under Rule 144 are
also subject to requirements regarding providing notice of such sales and the
availability of current public information concerning us. Affiliates may sell
shares not constituting restricted securities in accordance with the foregoing
volume limitations and other requirements but without regard to the one-year
holding period.
Under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted securities were acquired from us or the date they
were acquired from an Affiliate, as applicable, a holder of such restricted
securities who is not an Affiliate at the time of the sale and has not been an
Affiliate for at least three months prior to the sale would be entitled to sell
the shares in the public market without regard to the volume limitations and
other restrictions described above.
Securities issued in reliance on Rule 701, such as shares of common stock
acquired upon exercise of options granted under our stock plans, are also
restricted and, beginning 90 days after the effective date of this prospectus,
may be sold by shareholders other than our affiliates, subject only to the
manner of sale provisions of Rule 144, and by affiliates under Rule 144 without
compliance with its one-year holding period requirement.
Options
We intend to file registration statements on Form S-8 under the Securities
Act to register approximately 15,600,000 shares of common stock issuable under
our stock plans. These registration statements are expected to be filed within
six months of the effective date of the registration statement of which this
prospectus is a part and will be effective upon filing. Shares issued upon the
exercise of stock options after the effective date of the Form S-8 registration
statements will be eligible for resale in the public market without
restriction, subject to Rule 144 limitations applicable to Affiliates and the
lock-up agreements described below.
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Lock-Up Agreements
Our officers and directors and substantially all of the holders of our
common stock have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, enter into a transaction which would have the
same effect, or enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of ownership of our
common stock, whether any such aforementioned transaction is to be settled by
delivery of our common stock or such other securities, in cash or otherwise, or
publicly disclose the intention to make any such offer, sale, pledge or
disposition, or enter into any such transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation for a period of 180 days after the date of this
prospectus.
Registration Agreement
Pursuant to the recapitalization, our company, Bain Capital, Bear Stearns,
and our other equity holders entered into a registration agreement (as amended
on December 23, 1999). Under the registration agreement, prior to an initial
public offering, the holders of a majority of the Class A common stock have the
right, and, at any time after an initial public offering, the holders of a
majority of the registrable securities owned by Bain Capital, Bear Stearns or
Intel, subject to conditions, to require us to register any or all of their
shares of common stock under the Securities Act on Form S-1, a "Long-Form
Registration." The holders of a majority of the Bain registrable securities
have the right to request three Long-Form Registrations, and the holders of a
majority of the Bear Stearns registrable securities and the Intel registrable
securities have the right to request one Long-Form Registration, in each case,
at our expense. The holders of a majority of the Bain registrable securities,
the Bear Stearns registrable securities and the Intel registrable securities
have the right to require us to register any or all of their shares of common
stock under the Securities Act on Form S-2 or Form S-3, a "Short-Form
Registration," on an unlimited number of, and three, occasions, respectively,
at our expense. We are not required, however, to effect any Short-Form
Registration requested by the holders of a majority of the Bear Stearns
registrable securities or the holders of a majority of the Intel registrable
securities within six months after the effective date of a prior demand
registration. We may postpone the filing of such registration for up to 90 days
if we and the holders of a majority of the registrable securities requesting
registration agree that such a registration would reasonably be expected to
have an adverse effect on any proposal or plan by us or any of our subsidiaries
to engage in an acquisition, merger or similar transaction.
In addition, all holders of registrable securities are entitled to request
the inclusion of any shares of common stock subject to the registration
agreement in any registration statement at our expense whenever we propose to
register any of our securities under the Securities Act. Such right to request
inclusion of shares is not permitted:
. in connection with a public offering, unless any holders of registrable
securities are permitted to participate in the public offering;
. pursuant to a demand registration; or
. pursuant to a registration on Form S-4 or S-8.
In connection with all such registrations, we have agreed to indemnify all
holders of registrable securities against liabilities set forth in the
registration agreement, including liabilities under the Securities Act. In
addition, all the parties to the registration agreement have agreed not to make
any public sales of their registrable securities for 180 days after the
effective date of any registration statement. Beginning 180 days after the
completion of the offering, the holders of an aggregate of 50,992,905 shares of
common stock, assuming an initial public offering price of $16.00 per share,
the midpoint of the range set forth on the cover of this prospectus, and a
Preference Amount of $19.72 per share on Class L common stock, will have
limited rights to require us to register their shares of common stock under the
Securities Act at our expense.
66
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc., Lehman Brothers Inc., Bear, Stearns & Co. Inc. and Pennsylvania
Merchant Group are acting as representatives, the following respective numbers
of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation..............................
FleetBoston Robertson Stephens Inc..................................
Lehman Brothers Inc.................................................
Bear, Stearns & Co. Inc.............................................
Pennsylvania Merchant Group.........................................
----------
Total............................................................. 12,500,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
Several of our shareholders have granted to the underwriters a 30-day option
to purchase on a pro rata basis up to 1,875,000 additional shares from them at
the initial public offering price less the underwriting discounts and
commissions. The option may be exercised only to cover any over-allotments of
common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus, and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
and the selling shareholders will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts
and
Commissions paid by
us................... $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting Discounts
and
Commissions paid by
selling
shareholders......... $ $ $ $
Expenses payable by
selling shareholders... $ $ $ $
</TABLE>
Bear, Stearns & Co. Inc., one of our underwriters, is an affiliate of our
company. The offering, therefore, is being conducted in accordance with the
applicable provisions of Rule 2720 of the National Association of Securities
Dealers, Inc. Conduct Rules. Rule 2720 requires that the initial public
offering price of the shares of common stock not be higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
Accordingly, FleetBoston Robertson Stephens, Inc. is assuming the
responsibilities of acting as the qualified independent underwriter in pricing
the offering and conducting due diligence. The initial public offering price of
the shares of common stock is no higher than recommended by FleetBoston
Robertson Stephens, Inc.
67
<PAGE>
Credit Suisse First Boston Corporation, Bear, Stearns & Co. Inc. and
Pennsylvania Merchant Group and their respective affiliates have performed and
expect to continue to perform financial advisory and investment and commercial
banking services for us for which they have received and will receive customary
compensation. We intend to use a portion of the net proceeds to repay in full
all outstanding obligations under our senior credit facility. Credit Suisse
First Boston, an affiliate of Credit Suisse First Boston Corporation, is a
lender and the administrative agent under the senior credit facility and will
receive some of the proceeds of this offering used to repay our outstanding
indebtedness under our senior credit facility. In addition, Credit Suisse First
Boston Corporation and Bear, Stearns & Co. Inc. were the initial purchasers in
the offering of our senior subordinated notes. An affiliate of Credit Suisse
First Boston Corporation and an affiliate of Bear, Stearns & Co. Inc. each own
common stock of the company and each is a selling shareholder in the offering.
John D. Howard, a director of our company, is a senior managing director of
Bear, Stearns & Co. Inc.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any shares of common stock or securities convertible into or exchangeable
or exercisable for any of our common stock, or publicly disclose the intention
to make any such offer, sale, pledge, disposition or filing, without the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
Our officers and directors and substantially all of the holders of our
common stock have agreed that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, enter into a transaction which would have the
same effect, or enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of ownership of our
common stock, whether any such aforementioned transaction is to be settled by
delivery of our common stock or such other securities, in cash or otherwise, or
publicly disclose the intention to make any such offer, sale, pledge or
disposition, or enter into any such transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of Credit Suisse
First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to 625,000 shares of common stock for employees, directors and certain
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.
We and the selling shareholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "ICST."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price for the common stock will be
negotiated among us, the selling shareholders and the representatives. Among
the principal factors to be considered in determining the initial public
offering price will be:
.market conditions for initial public offerings
.the history of and prospects for our business
.our past and present operations
.our past and present earnings and current financial position
68
<PAGE>
.an assessment of our management
.the market of securities of companies in businesses similar to ours
.the general condition of the securities markets.
There can be no assurance that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market will develop
and continue after the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by such
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic form will be available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations.
69
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we and the selling
shareholders prepare and file a prospectus with the securities regulatory
authorities in each province where trades of the common stock are effected.
Accordingly, any resale of the common stock in Canada must be made in
accordance with applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of the common stock in Canada who receives a purchase
confirmation will be deemed to represent to us, the selling shareholders and
the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable provincial securities laws to purchase
such common stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, such purchaser is purchasing as
principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions".
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuers directors and officers as well as the experts named
herein and the selling shareholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of the common stock acquired on the same date and
under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of the common stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
70
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Pepper Hamilton LLP, Philadelphia, Pennsylvania, and certain other matters
will be passed upon for us by Kirkland & Ellis (a partnership that includes
professional corporations), New York, New York. Some partners of Kirkland &
Ellis are partners in Randolph Street Partners, which owns 272,626 shares of
common stock. Some legal matters in connection with this offering will be
passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York. Kirkland & Ellis and Skadden, Arps, Slate, Meagher & Flom
LLP have, from time to time, represented, and may continue to represent, some
of the underwriters in connection with various legal matters and Bain Capital
and some of their affiliates (including our company) in connection with legal
matters.
EXPERTS
The consolidated financial statements and schedule of our company and its
subsidiaries as of July 3, 1999 and June 27, 1998, and for each of the fiscal
years in the three-year period ended July 3, 1999 have been included herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of KPMG LLP as experts in accounting and auditing.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective August 10, 1999, we dismissed KPMG LLP as our independent
accountants. Concurrent with such dismissal, we engaged PricewaterhouseCoopers
LLP as our independent accountants. The decision to dismiss KPMG LLP as our
independent accountants was approved by our board of directors.
The reports of KPMG LLP on our consolidated financial statements for each of
the fiscal years in the three year period ended July 3, 1999 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified
as to uncertainty, audit scope or accounting principles.
In connection with the audits of our consolidated financial statements for
each of the fiscal years in the three year period ended July 3, 1999, and
through August 10, 1999, there were no disagreements between us and KPMG LLP on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of KPMG LLP, would have caused them to make reference to the
matter in their reports.
WHERE YOU CAN FIND MORE INFORMATION
We are currently subject to the informational requirements of the Exchange
Act, and in accordance therewith we are required to file periodic reports and
other information with the SEC. The reports and other information filed by us
with the SEC may be inspected and copied at the public reference facilities
maintained by the SEC as described below.
We have filed with the SEC a registration statement on Form S-1 (the
"Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules
and regulations promulgated thereunder, with respect to the shares of common
stock offered hereby. This prospectus, which constitutes part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, parts of which are omitted in accordance with the rules
and regulations of the SEC. For further information with respect to us and the
common stock offered hereby, reference is made to the Registration Statement.
Statements made in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such
71
<PAGE>
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Registration Statement, including the exhibits thereto, can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 (telephone number: 1-800-
SEC-0330), at the Regional Offices of the SEC at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a website
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
such site is http://www.sec.gov.
We intend to furnish our shareholders with annual reports containing
financial statements audited by an independent accounting firm, and to make
available quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Annual Financial Statements:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of July 3, 1999, and June 27, 1998....... F-3
Consolidated Statements of Operations for the years ended July 3, 1999,
June 27, 1998, and
June 28, 1997.......................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) as of July 3,
1999, June 27, 1998, and June 28, 1997................................. F-5
Consolidated Statements of Cash Flows for the years ended July 3, 1999,
June 27, 1998, and
June 28, 1997.......................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Consolidated Interim Financial Statements:
Consolidated Balance Sheets as of January 1, 2000 (unaudited) and July
3, 1999................................................................ F-37
Consolidated Statements of Operations for the three and six months ended
January 1, 2000 and
December 26, 1998 (unaudited).......................................... F-38
Consolidated Statements of Cash Flows for the six months ended January
1, 2000 and
December 26, 1998 (unaudited).......................................... F-39
Notes to Consolidated Financial Statements.............................. F-40
</TABLE>
F- 1
<PAGE>
When the stock-split referred to in Note 24 of the Notes to the Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report.
/s/ KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Integrated Circuit Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Circuit Systems, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998,
and the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
July 3, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Circuit Systems, Inc. and subsidiaries as of July 3, 1999 and June 27, 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended July 3, 1999, in conformity with generally
accepted accounting principles.
Philadelphia, Pennsylvania
August 4, 1999, except as to
Note 24, which is as of March 27, 2000
F-2
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
July 3, June 27,
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 9,285 $ 25,340
Marketable securities................................... 288 16,480
Accounts receivable, net................................ 18,120 20,335
Inventory, net.......................................... 8,736 12,839
Deferred income taxes................................... 8,644 2,069
Prepaid income taxes.................................... -- 1,067
Prepaid assets.......................................... 797 590
Other assets............................................ 523 2,043
Current portion of deposit on purchase contracts........ 3,973 --
--------- --------
Total current assets.................................. 50,366 80,763
Property and equipment, net............................... 12,127 17,884
Deferred financing costs, net............................. 12,767 --
Deposits on purchase contracts............................ 11,348 7,864
Other assets.............................................. 1,187 1,498
--------- --------
Total assets.......................................... $ 87,795 $108,009
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long-term debt....................... $ 1,030 $ 143
Accounts payable........................................ 10,258 11,047
Accrued salaries and bonuses............................ 2,056 1,788
Accrued expenses and other current liabilities.......... 5,639 2,672
Income taxes payable.................................... 4,473 --
--------- --------
Total current liabilities............................. 23,456 15,650
Long-term debt, less current portion...................... 169,000 1,380
Deferred income taxes..................................... 789 1,211
Other liabilities......................................... 1,462 --
--------- --------
Total liabilities..................................... 194,707 18,241
--------- --------
Commitments and contingencies (See Notes 4, 5, 11 and 21)
Shareholders' Equity (Deficit):
Preferred stock, authorized 5,000 shares, none issued... -- --
Common stock, no par value, authorized 84,710: issued
22,192 shares as of June 27, 1998...................... -- 56,604
Class A common stock, $0.01 par, authorized 45,743;
issued and outstanding 26,452 shares................... 264 --
Class B common stock, $0.01 par, authorized 11,859;
issued and outstanding 9,577 shares.................... 96 --
Class L common stock, $0.01 par, authorized 5,083;
issued and outstanding 4,003 shares.................... 40 --
Additional paid in capital.............................. 34,556 --
Less treasury stock, at cost (1,311 shares at June 27,
1998).................................................. -- (16,742)
(Accumulated deficit)/retained earnings................. (141,413) 49,906
Notes receivable (see Note 19).......................... (455) --
--------- --------
Total shareholders' equity (deficit).................. (106,912) 89,768
--------- --------
Total liabilities and shareholders' equity (deficit).. $ 87,795 $108,009
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended
----------------------------
July 3, June 27, June 28,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue.......................................... $139,063 $160,634 $104,359
Cost and expenses:
Cost of sales.................................. 64,496 88,859 59,137
Research and development....................... 21,316 19,797 13,521
Selling, general and administrative............ 19,560 19,444 15,118
Special charges:
Compensation costs (see Note 15)............. 15,051 -- --
Write-off of in-process research and
development costs........................... -- -- 11,196
Goodwill amortization.......................... 234 234 536
-------- -------- --------
Operating income............................. 18,406 32,300 4,851
Gain on sale of assets (see Note 3).............. (10,734) -- --
Interest and other income........................ (2,178) (1,984) (1,800)
Interest expense................................. 2,955 64 63
Impairment in equity investment.................. -- -- 7,072
Minority interest................................ -- -- (154)
Equity loss of investee.......................... -- -- 866
-------- -------- --------
Income (loss) before income taxes from
continuing operations......................... 28,363 34,220 (1,196)
Income tax expense............................... 5,320 12,845 6,314
-------- -------- --------
Income (loss) from continuing operations....... 23,043 21,375 (7,510)
-------- -------- --------
Discontinued operations:
Loss from operations........................... -- -- (1,773)
Gain on disposal............................... -- -- 864
-------- -------- --------
Loss from discontinued operations................ -- -- (909)
-------- -------- --------
Net income (loss)................................ $ 23,043 $ 21,375 $ (8,419)
======== ======== ========
Basic income (loss) per share:
Income (loss) from continuing operations......... $ 0.87 $ 1.02 $ (0.38)
Loss from discontinued operations................ -- -- (0.09)
Gain on disposal................................. -- -- 0.04
-------- -------- --------
$ 0.87 $ 1.02 $ (0.43)
======== ======== ========
Diluted income (loss) per share:
Income (loss) from continuing operations......... $ 0.86 $ 0.96 $ (0.38)
Loss from discontinued operations................ -- -- (0.09)
Gain on disposal................................. -- -- 0.04
-------- -------- --------
$ 0.86 $ 0.96 $ (0.43)
======== ======== ========
Weighted average shares outstanding--basic....... 25,814 20,912 19,439
======== ======== ========
Weighted average shares outstanding--diluted..... 26,278 22,264 19,439
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Notes
Receivable
Common Common From Additional
Stock Stock Class A Class A Class B Class B Class L Class L Certain Paid-In Treasury Treasury
Shares Amount Shares Amounts Shares Amounts Shares Amounts Management Capital Stock Shares
------- -------- ------- ------- ------- ------- ------- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
29, 1996......... 19,295 $ 32,674 -- $-- -- $-- -- $-- $ -- $ -- $ (460) (35)
Shares issued
upon exercise of
stock options... 1,789 10,807 -- -- -- -- -- -- -- -- -- --
Tax benefits
related to stock
options......... -- 2,039 -- -- -- -- -- -- -- -- -- --
Purchase of
common stock.... -- -- -- -- -- -- -- -- -- -- (10,466) (792)
Acquisition of
MicroClock,
Inc............. -- 34 -- -- -- -- -- -- -- -- 7,966 609
Sale of Galaxy
Power........... -- -- -- -- -- -- -- -- -- -- (789) (68)
Subsidiaries
equity
transactions.... -- (188) -- -- -- -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- --
------- -------- ------ ---- ----- ---- ----- ---- ----- ------- -------- -----
Balance at June
28, 1997......... 21,084 45,366 -- -- -- -- -- -- -- -- (3,749) (286)
Shares issued
upon exercise of
stock options... 1,108 7,014 -- -- -- -- -- -- -- -- -- --
Tax benefits
related to stock
options......... -- 4,224 -- -- -- -- -- -- -- -- -- --
Purchase of
common stock.... -- -- -- -- -- -- -- -- -- -- (12,993) (488)
Net income...... -- -- -- -- -- -- -- -- -- -- -- --
------- -------- ------ ---- ----- ---- ----- ---- ----- ------- -------- -----
Balance at June
27, 1998......... 22,192 56,604 -- -- -- -- -- -- -- -- (16,742) (774)
Shares issued
upon exercise of
stock options... 159 1,105 -- -- -- -- -- -- -- -- -- --
Tax benefits
related to stock
options......... -- 234 -- -- -- -- -- -- -- -- -- --
Purchase of
common stock.... -- -- -- -- -- -- -- -- -- -- (3,016) (229)
Recapitalization.. (13,193) (57,943) 15,613 156 5,653 57 2,363 24 (455) 34,719 19,758 1,003
Effect of stock
split........... (9,158) -- 10,839 108 3,924 39 1,640 16 -- (163) -- --
Net income...... -- -- -- -- -- -- -- -- -- -- -- --
------- -------- ------ ---- ----- ---- ----- ---- ----- ------- -------- -----
Balance at July
3, 1999.......... -- $ -- 26,452 $264 9,577 $ 96 4,003 $ 40 $(455) $34,556 $ -- --
======= ======== ====== ==== ===== ==== ===== ==== ===== ======= ======== =====
<CAPTION>
(Accumulated Total
Deficit/) Shareholders'
Retained Equity
Earnings (Deficit)
------------ -------------
<S> <C> <C>
Balance at June
29, 1996......... $ 36,950 $ 69,164
Shares issued
upon exercise of
stock options... -- 10,807
Tax benefits
related to stock
options......... -- 2,039
Purchase of
common stock.... -- (10,466)
Acquisition of
MicroClock,
Inc............. -- 8,000
Sale of Galaxy
Power........... -- (789)
Subsidiaries
equity
transactions.... -- (188)
Net loss........ (8,419) (8,419)
------------ -------------
Balance at June
28, 1997......... 28,531 70,148
Shares issued
upon exercise of
stock options... -- 7,014
Tax benefits
related to stock
options......... -- 4,224
Purchase of
common stock.... -- (12,993)
Net income...... 21,375 21,375
------------ -------------
Balance at June
27, 1998......... 49,906 89,768
Shares issued
upon exercise of
stock options... -- 1,105
Tax benefits
related to stock
options......... -- 234
Purchase of
common stock.... -- (3,016)
Recapitalization.. (214,362) (218,046)
Effect of stock
split........... -- --
Net income...... 23,043 23,043
------------ -------------
Balance at July
3, 1999.......... $(141,413) $(106,912)
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
-----------------------------
July 3, June 27, June 28,
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $ 23,043 $ 21,375 $ (8,419)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.................. 4,965 4,579 3,744
Amortization of deferred finance charge........ 203 -- --
Amortization of bond premiums.................. (78) (2) (85)
Minority interest and charges related to equity
investment.................................... -- -- 7,492
(Gain) loss on sale of assets.................. (10,374) 633 (356)
Purchase of trading securities................. (23,313) (12,930) (834)
Sale of trading securities..................... 23,669 11,911 845
Loss from discontinued operations.............. -- -- 909
Deferred income taxes.......................... (6,995) (712) 1,541
Write-off of in-process research & development
costs......................................... -- -- 11,196
Stock compensation............................. -- -- 84
Accounts receivable............................ 2,215 355 (8,808)
Inventory...................................... 4,103 703 2
Other assets, net.............................. 794 (235) (686)
Accounts payable, accrued expenses and other
liabilities................................... 678 81 3,480
Income taxes payable........................... 5,540 (3,413) 292
--------- -------- --------
Net cash provided by operating activities..... 24,450 22,345 10,397
--------- -------- --------
Cash flows from investing activities:
Capital expenditures........................... (7,694) (8,139) (3,358)
Proceeds from sale of fixed assets............. 200 10 107
Proceeds from sale of Datacom.................. 16,000 -- --
Proceeds from sale of building................. 3,801 -- --
Proceeds from sales of marketable securities... 18,450 1,358 --
Proceeds from sale of discontinued operations.. -- -- 1,925
Proceeds from maturities of marketable
securities.................................... 29,347 21,069 10,499
Purchases of marketable securities............. (31,973) (30,499) (18,371)
Deposits on purchase contracts, net............ (12,000) (2,000) (6,000)
Refunds on purchase contracts.................. 4,544 4,711 1,998
Investment in subsidiary, net of cash
acquired...................................... -- -- (6,074)
--------- -------- --------
Net cash provided by (used in) investing
activities................................... 20,675 (13,490) (19,274)
--------- -------- --------
Cash flows from financing activities:
Net borrowings (repayments) under line of
credit agreement.............................. -- -- (2,315)
Repayments of long-term debt................... (114) (186) (138)
Proceeds from exercise of stock options........ 1,105 7,015 10,807
Tax benefit of stock option exercise........... 234 4,224 2,038
Proceeds from long-term debt................... 170,030 -- --
Recapitalization............................... (247,104) -- --
Investment from equity investors............... 30,655 -- --
Deferred financing charges..................... (12,970) -- --
Purchase of treasury stock..................... (3,016) (12,993) (10,466)
--------- -------- --------
Net cash used in financing activities......... (61,180) (1,940) (74)
--------- -------- --------
Net increase (decrease) in cash................. (16,055) 6,915 (8,951)
Cash and cash equivalents:
Beginning of year.............................. 25,340 18,425 27,376
--------- -------- --------
End of year.................................... $ 9,285 $ 25,340 $ 18,425
========= ======== ========
Supplemental disclosures of cash information:
Cash payments during the period for:
Interest....................................... $ 151 $ 65 $ 58
========= ======== ========
Income taxes................................... $ 6,408 $ 11,840 $ 2,336
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, after elimination of all
significant intercompany accounts and transactions.
Reporting Periods
In fiscal year 1996 the Company changed its fiscal year to a 52/53 week
operating cycle that ends on the Saturday nearest June 30. Fiscal year 1999
represents a 53-week operating cycle. Fiscal years 1998 and 1997 represent a
52-week operating cycles.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and
cash equivalents at July 3, 1999 consist of cash, overnight retail repurchase
agreements (collateralized by U.S. Treasury obligations), money market funds
and commercial paper.
Marketable Securities
Marketable securities at July 3, 1999 consist of debt securities. Under
Statement No. 115, the Company classifies all of its debt securities as held
to maturity, which are recorded at amortized cost. In prior years, the
Company's equity securities were classified as trading securities and
unrealized holding gains and losses are included in earnings. Trading
Securities were carried at the present market value, with realized gains or
losses recorded in interest income on the statement of operations. As a result
of the restrictions imposed by the senior credit facility (see Note 10), the
Company no longer invests in equity securities.
Inventory
Inventory is stated at the lower of standard cost, which approximates
actual cost (FIFO basis) or market.
Property, Plant and Equipment
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Machinery and equipment........................................ 3 to 10 years
Furniture and fixtures......................................... 5 to 10 years
</TABLE>
Leasehold improvements are amortized over the shorter of the lease term or
the estimated useful life.
Deferred Financing Costs
Costs incurred in connection with the issuance of the senior credit
facility and the senior subordinated notes (see Note 10), which are amortized
over the average term of the related debt instruments, approximately 8 years
at July 3, 1999. Accumulated amortization was $0.2 million as of July 3, 1999.
F-7
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Goodwill
The purchase price in excess of the fair value of net assets acquired is
amortized on a straight-line basis over 7 years. Accumulated amortization was
$0.5 million and $0.3 million as of July 3, 1999 and June 27, 1998,
respectively. Goodwill is recorded in other assets on the consolidated balance
sheet.
Carrying Value of Long-Term Assets
In accordance with SFAS 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of," the Company periodically
evaluates the carrying value of long-term assets when events and circumstances
warrant such review. The carrying value of a long lived asset is considered
impaired when the anticipated undiscounted cash flows from such asset is
separately identifiable and is less than the carrying value. In that event a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined by
reference to quoted market prices, if available, or the utilization of certain
valuation techniques such as using the anticipated cash flows discounted at a
rate commensurate with the risk involved. See Note 3 for a discussion of an
impairment charge recognized on the Voyetra Technologies Inc. ("Voyetra")
investment, which was recorded in the fourth quarter of fiscal year 1997.
Revenue Recognition
Product sales are recognized as revenue upon shipment to the customer. The
Company offers a right of return to certain customers. Allowances are
established to provide for estimated returns at the time of sale. The Company
recognizes sales to these customers, in accordance with the criteria of FASB
No. 48, at the time of the sale based on the following: the selling price is
fixed at the date of sale, the buyer is obligated to pay the Company, title of
the property transfers at the Company's loading dock, the buyer has economic
substance apart from the Company, the Company does not have further obligations
to assist the buyer in the resale of the product and the returns can be
reasonably estimated at the time of sale.
Concentration of Credit Risk
The Company sells its products primarily to original equipment manufacturers
and distributors in North America, Europe and the Pacific Rim. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential credit losses. Concentrations of credit risk with respect to trade
accounts receivable from specific customers is limited due to the large number
of customers, however, there is a substantial concentration in the personal
computer industry. Refer to Note 18 for geographic information.
Income Taxes
Income taxes are computed in accordance with Statement of Financial
Accounting Standards No. 109. The Company files a consolidated federal tax
return with its 80% or more owned subsidiaries, which included Turtle Beach for
the first five months of fiscal year 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, revenues and expense, and the disclosure of contingent
assets and liabilities at
F-8
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the date of the financial statements. In addition, they affect the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates and assumptions.
Accounting for Stock-based Compensation
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), and continues to apply APB 25 and related interpretation in accounting
for its stock options to employees and directors. Refer to Note 15 for pro
forma disclosures.
Reclassification of Accounts
Certain reclassifications have been made to conform prior year's balances
to the current year presentation.
Other Comprehensive Income
The Company's reported net income (loss) for all periods presented is the
same as it's comprehensive income or loss since there were no items of other
comprehensive income or loss for any of the periods covered by these financial
statements.
New Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities," which
defers effective date of SFAS No. 133 to fiscal years beginning after June 15,
2000. The Company will adopt the requirements of this statement in fiscal
2001.
(2) Acquisitions/Mergers
On May 11, 1999, the Company merged with ICS Merger Corp., a transitory
merger company formed and wholly owned by certain affiliates of Bain Capital
Inc. and Bear, Stearns and Company Inc. (the "Equity Investors"). The
following events, which collectively are referred to as our recapitalization,
provided the consideration for the redemption and purchase of the Company's
outstanding shares of common stock and vested options, together with the
redemption and purchase of our outstanding shares of common stock and vested
options, together with the payment of fees and expenses, totaling $294.4
million that took place on May 11, 1999:
--An equity investment of $30.6 million made by the Equity Investors and
certain other investors in ICS Merger Corp.;
--Direct purchases by Bain Capital of our common stock from certain
existing shareholders for $9.6 million;
--A rollover and new equity investment by certain members of our senior
management team of $9.8 million, consisting primarily of:
--Certain existing common stock ($6.6 million) that was converted into
our new common stock after the merger; and
--Certain existing stock options that were converted into new stock
options after the merger ($2.2 million) and deferred compensation
agreements ($0.5 million);
--Purchases of new common stock ($0.5 million) in exchange for
promissory notes;
F-9
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--Borrowing of $70.0 million in term loans and $3.9 million under a $25.0
million revolving line of credit;
--The offering of $100.0 million in senior subordinated notes (the
"Notes"); and
--The use of cash on-hand of $70.5 million.
The merger was approved by the Company's previous board of directors and the
board of directors of ICS Merger Corp., and was also approved by the previous
shareholders at a meeting held on May 10, 1999.
Since the recapitalization, the Company's common stock is no longer traded
on the Nasdaq National Market or any exchange, price quotations are no longer
available and the registration of the Company's common stock under the
Securities Exchange Act of 1934 has been terminated.
On February 28, 1997, the Company acquired all the capital stock of
MicroClock, Inc. ("MicroClock"), a producer of clock synthesizer integrated
circuits for multimedia applications, for approximately $16.4 million,
consisting of $6.4 million in cash and 1,030,928 shares of ICS common stock.
The Company's shares exchanged in the transaction were restricted from sale for
one year, therefore, the shares were valued at a 20% discount from the closing
price on the date of issuance based on an independent valuation. The
acquisition was accounted for under the purchase method of accounting and
resulted in a charge of $11.2 million related to the write-off of in-process
research and development costs and the recording of goodwill of $1.7 million,
which is being amortized over 7 years. In determining the write-off of in-
process research and development expenses, MicroClock was valued as a whole,
and then the portion of the value attributable to technology, which had not
reached technical and/or commercial feasibility, was identified. This was
determined to be in-process research and development, and the residual portion
of the purchase consideration after assigning values to the net tangible assets
and in-process research and development was recorded as goodwill. The method
used in making the determination was the discounted probable future cash flows
on a product by product basis. The assumptions used in the appraisal were:
three-year net cash flow on a product with no material changes from historical
pricing, margins and expense levels. The amount attributable to goodwill was
included as an amortizable item on the Company's balance sheet, and the amount
attributable to in-process research and development was written off as not
being sufficiently evolved to be commercialized or to readily ascertain the
future commercial value of the same as of the date of acquisition. Revenues and
results of operations of MicroClock were not significant to the Company's
consolidated statement of operations for the year ended June 28, 1997, and
accordingly, pro forma information as if the transaction had occurred on June
29, 1996, has not been presented.
The in-process research and development projects included applications such
as communications, desktop, notebook, set-top boxes and oscillators. These
projects enabled the Company to reach a customer base in which it had not been
able to reach, penetrate a new market with the consumer electronics
applications and offered additional future returns. The risks associated with
their timely completion included technical issues relating to the projects,
ability to retain its employee base after the merger and ability to obtain
project materials from third party vendors. Management assigned approximately
87% of MicroClock's total product value to the in-process research and
development projects at the time of acquisition. The Company has spent an
additional $885,000 on these projects and had taken six months to complete
these projects. The Company used its working capital to fund the completion of
these projects.
On November 29, 1996 the Company signed an Agreement and Plan of Merger,
(the "Merger Agreement") to sell its approximately 87% interest in Turtle Beach
Systems, Inc. ("Turtle Beach") to Voyetra
F-10
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in exchange for an approximately 35% equity interest in Voyetra. Voyetra is a
supplier of music and audio software. No gain or loss was initially recorded on
this transaction. The Company's proportionate share of underlying equity in
Voyetra was approximately $3.5 million. The excess of the Company's carrying
value over their proportionate share of underlying equity was approximately
$4.3 million. Subsequent to the transaction, the Company accounted for its
investment in Voyetra under the equity method of accounting. In connection with
the merger, the Company also entered into a Revolving Credit Agreement and Note
Arrangement (the "Revolving Credit Agreement") with Voyetra, pursuant to which
the Company agreed to make loans to Voyetra up to an aggregate of $3.5 million,
subject to certain covenants. The Company recorded an impairment loss on this
investment in the fourth quarter of fiscal year 1997. (See
Dispositions/Impairment Note 3).
(3) Dispositions/Impairment
In the third quarter of fiscal year 1999, the Company sold intellectual
property and engineering hardware and software related to its data
communications product line to 3Com Corporation for approximately $16.0 million
in cash, resulting in a gain of approximately $10.7 million. Under the
agreement, the Company will have certain licensing and technical support
rights, and will continue to sell and support its existing and prospective fast
ethernet transceiver product family to current and new customers.
During the fourth quarter of fiscal year 1997, the Company determined that
significant events and changes in circumstances had occurred subsequent to the
Voyetra transaction that indicated it was probable that its investment in
Voyetra would not be recoverable. In the opinion of the Company's management,
Voyetra was experiencing an adverse shift in the fundamentals of its business,
which resulted in deteriorating gross profit margins and a substantial increase
in operating losses. In addition, during the fourth quarter of fiscal year
1997, the Company notified Voyetra that they had violated certain covenants and
were in default under the Revolving Credit Agreement. As such, the Company
concluded that it was under no obligation to provide financing under the
Revolving Credit Agreement. As a result of these significant events in the
fourth quarter of fiscal year 1997, management of the Company estimated that
the undiscounted cash flows anticipated for Voyetra would not be sufficient to
recover the carrying value of the Company's investment and a write-down to fair
value was required. Consequently, in the fourth quarter of fiscal year 1997,
the Company recorded an impairment loss of $7.1 million on its investment in
Voyetra, which is included in the Statement of Operations as Impairment in
equity investment. In the second quarter of fiscal year 1998, Voyetra filed a
complaint in the Supreme Court of the State of New York against the Company. At
the end of the second quarter, the Company and Voyetra reached a settlement.
Voyetra released the Company from all claims and all obligations with respect
to the Voyetra/Turtle Beach merger agreement in exchange for assumption of
certain liabilities of Turtle Beach, a $200,000 cash payment and return of
Voyetra stock held by the Company. During fiscal year 1998, the Company settled
these obligations and returned the Voyetra stock.
During the third quarter of fiscal year 1997, the Company implemented a
plan, with approval by the Board of Directors, to dispose of its majority
interest in its subsidiary, ARK Logic, within a 12-month period. Accordingly,
the Company presented ARK Logic as a discontinued operations. In connection
with these events, the Company recorded a charge of $1.5 million in the third
quarter fiscal year 1997, including severance and facility termination costs.
Subsequently, the Company sold approximately 80% of its holdings in ARK Logic
to Vision 2000 Ventures, Ltd. ("Vision 2000") for which a gain of $0.9 million,
including the reversal of severance and facility termination accruals, was
recorded. The sale and purchase agreement required 20% of the sales price to be
held in escrow for two years. The Company received the escrow amount plus
interest $0.5 million in June 1999. The amounts from discontinued operations
are not tax effected, as ARK Logic was not consolidated for tax purposes and
ARK Logic has net operating loss carryforwards, for which no tax benefits had
been recorded by the Company. Revenues from ARK Logic for fiscal years 1997 and
1996 were $1.8 million and $10.2 million, respectively.
F-11
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the first quarter of fiscal year 1997, the Company sold its Galaxy
Power, Inc. subsidiary, which owned the assets related to the battery charge
controller product line, for $0.8 million to Edward H. Arnold, former Chairman
and CEO of the Company. The purchase consideration was satisfied by
reacquisition of 115,861 shares of the Company's stock held by Arnold and was
based on a valuation made by an independent appraiser.
(4) Purchase Commitments
During fiscal year 1998, under an existing wafer supply contract with
Chartered Semiconductor PTE ("CSM"), the Company advanced the final $2.0
million installment of its deposit with CSM whereby CSM would supply an agreed
minimum quarterly quantity of wafers April 1996 through June 2002 at specified
prices. This non-interest bearing deposit is recorded as a long-term asset
under the caption "Deposits on purchase contract" and will be progressively
repaid from January 1, 1998, as wafers are purchased. On October 7, 1998, the
Company assumed a third party's wafer purchase contract with CSM. The
agreement required the Company to advance $12.0 million as part of a mutual
commitment for CSM to supply and the company to purchase an agreed upon
minimum quarterly quantity of wafers over a twenty-seven month period from
October 1, 1998 to December 31, 2000. The agreement requires CSM to refund the
deposit to the Company in progressive quarterly installments based upon the
volume of purchases made by the Company, and it is contractually required for
all of the deposit to be returned. On October 21, 1998, the Company funded the
$12.0 million required by this agreement. As of July 3, 1999, CSM has repaid
$6.7 million of the Company's deposit. As of July 3, 1999 and June 27, 1998
amounts on deposit with CSM were $15.3 million and $7.9 million respectively.
The Company had previously entered into a similar agreement with American
Microsystems, Inc., ("AMI") by which it placed a $5.5 million deposit, which
has been progressively repaid as wafer purchases were made. The Company
received $2.6 million from AMI in fiscal 1998 extinguishing the balance of any
outstanding deposit at AMI.
The following table summarizes activity relating to the purchase commitment
from CSM (in thousands):
<TABLE>
<S> <C>
Balance 6/28/97..................................................... $ 8,000
Deposits made..................................................... 2,000
Payments received................................................. (2,136)
-------
Balance 6/27/98..................................................... 7,864
Deposits made..................................................... 12,000
Payments received................................................. (4,543)
-------
Balance 7/03/99..................................................... 15,321
Less: current portion............................................. 3,973
-------
Long term portion of deposit...................................... $11,348
=======
</TABLE>
(5) Other Agreements
In fiscal year 1998, the Company entered into a non-transferable and non-
exclusive license with Philips Electronics to the Company to use their
technical information for data transmission systems. In consideration of the
licenses and rights granted, the Company, during fiscal year 1999 and fiscal
year 1998, has expensed and paid approximately $0.5 million in royalty fees
and expects to continue to make ongoing payments. The expense is included in
the Company's cost of sales amount on the Statement of Operations.
In fiscal year 1999, the Company entered into a non-exclusive and non-
revocable license with PhaseLink Laboratories to use of their technical data.
In return, in July 1999, the Company paid a one-time fee of $200,000, which
will be amortized over the useful life of the technology (5 years).
F-12
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Marketable Securities
The Company invests in debt securities, which are classified as held to
maturity. The estimated fair value of each investment approximates the cost,
and therefore, there were no unrealized gains or losses as of July 3, 1999 and
June 27, 1998. Historically, the Company invested in equity securities, which
were classified as trading securities and recorded at market value. The Company
recorded unrealized losses of approximately $0.1 million in the statement of
operations for fiscal year 1998 and $0 for fiscal year 1999. Proceeds from the
sale or maturity of the investments were $71.5 million and $34.3 million in
fiscal year 1999 and fiscal year 1998, respectively. All investments are due
within 90 days and therefore, are classified as cash and cash equivalents at
July 3, 1999. As a result of the restrictions imposed by the senior credit
facility (see Note 10), the Company no longer invests in equity securities.
(7) Accounts Receivable
The components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
June
July 3, 27,
1999 1998
------- -------
<S> <C> <C>
Accounts receivable........................................ $20,270 $22,128
Less: reserves for returns and doubtful accounts........... (2,150) (1,793)
------- -------
$18,120 $20,335
======= =======
</TABLE>
(8) Inventory
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
June
July 3, 27,
1999 1998
------- -------
<S> <C> <C>
Work-in-process............................................ $ 8,211 $ 6,370
Finished parts............................................. 5,665 9,829
Less: obsolescence reserve................................. (5,140) (3,360)
------- -------
Inventory, net............................................. $ 8,736 $12,839
======= =======
</TABLE>
(9) Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
July 3, June 27,
1999 1998
-------- --------
<S> <C> <C>
Land and building........................................ $ -- $ 5,562
Machinery and equipment.................................. 17,377 25,918
Furniture and fixtures................................... 2,036 1,630
Leasehold improvements................................... 3,735 308
-------- --------
23,148 33,418
Less: accumulated depreciation and amortization.......... (11,021) (15,534)
-------- --------
Property and equipment, net.............................. $ 12,127 $ 17,884
======== ========
</TABLE>
Depreciation and amortization expense related to property and equipment was
$4.7 million, $4.3 million and $3.3 million in 1999, 1998 and 1997,
respectively.
F-13
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Debt
On May 10, 1999, the shareholders of the Company voted to approve the
management-led buyout, which was completed on May 11, 1999. In connection with
the recapitalization, the Company obtained financing consisting of: $100.0
million of senior subordinated notes (the "Notes"), term A loans for $30.0
million and the term B loans for $40.0 million and $3.9 million from a
revolving credit facility. The term loans and revolving credit facility
combined make up the Senior Credit Facility.
The term A loan is payable over varying quarterly installments beginning
September 30, 1999 through May 11, 2004. The term B loan is payable in varying
quarterly installments beginning September 30, 1999 through May 11, 2006. The
revolving loans can be repaid without paying a premium or penalty, other than
payment of breakage costs and reimbursement of the lenders' actual re-
employment costs under certain circumstances through May 30, 2004. The
revolving credit facility permits total availability of $25.0 million. At the
Company's option, the interest rates under the senior credit facility will be
either (1) the base rate, which is the higher of the prime lending rate or 0.5%
in excess of the Federal funds effective rate, plus a margin or (2) adjusted
LIBOR plus a margin. The margins of the different loans under the senior credit
facility will initially be set and then will vary according to a pricing grid
based upon the consolidated leverage ratio as follows: the initial margin on
the term A loan and revolving loans will be 2.0% over the base rate or 3.0%
over adjusted LIBOR, and then on each of the term A and revolving loans the
margins will range from 1.75%-0.75% for base rate or from 2.75%-1.75% for
adjusted LIBOR; and the initial margin on the term B loan will be 2.5% over the
base rate or 3.5% over adjusted LIBOR, and then on the term B loans the margins
will range from 2.25%-2.00% for base rate or from 3.25%-3.00% for adjusted
LIBOR.
The $100.0 million of senior subordinated notes are due May 15, 2009.
Interest on the notes will accrue at the rate of 11.5% per annum and will be
payable semi-annually on May 15 and November 15 of each year, commencing on
November 15, 1999, to holders of record on the immediately preceding May 1 and
November 1. Except in the case of certain equity offerings by the Company and
certain kinds of changes of control, the Company can not choose to redeem the
Notes until May 15, 2004. At anytime before May 15, 2002, the Company can
choose to redeem up to 35% of the outstanding Notes with money that the Company
raises in one or more equity offerings, as long as the Company's pays 111.5% of
the principal amount of the Notes plus accrued interest and at least $65.0
million of the Notes originally issued remain outstanding afterwards. All of
the Company's domestic subsidiaries guarantee the Notes with unconditional
guarantees of payment that will rank below their senior indebtedness, but will
rank equal to their other senior subordinated indebtedness in right of payment.
The Notes contain covenants that limit what the Company may do, such as paying
dividends, incurring additional indebtedness, transferring or selling assets
and consolidating, merging or selling all or substantially all of the Company's
assets of subsidiaries.
Certain of the Company's loan agreements require the maintenance of
specified financial ratios and impose financial limitations. At July 3, 1999,
the Company was in compliance with its senior credit facility covenants. The
debt is secured by substantially all assets from the Company and its domestic
subsidiaries.
On April 13, 1999, the Company sold the land and building at the Company's
Norristown location to BET Investments III, L.P., a Pennsylvania limited
partnership. The purchase price for the property was $3.9 million and included
the buyer's assumption of the Company's PIDA loan. BET Investments III, L.P.
assigned its right to purchase the building to BET Investments IV, L.P., a
Pennsylvania limited Partnership on January 29, 1999. The Company signed a
lease with BET Investments IV L.P., to lease back the Norristown property for a
term of eight years, which went into effect upon closing of the sale of the
property by the Company. The Company leased back the entire building with
monthly rent beginning at approximately $51,000 for the first year and
progressively increasing each year to approximately $63,000 in the eighth year.
The Company also has a
F-14
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
renewal option of three more years subsequent to the initial eight-year term.
The Company recorded a $0.9 million deferred gain from this transaction. The
Company will recognize the gain over the original term of the lease. In fiscal
year 1999, the Company received $0.2 million in sublease income from this
property.
Senior debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
July 3, June 27,
1999 1998
-------- --------
<S> <C> <C>
Term A loans payable in varying installments through 2004
at LIBOR plus 3 (8.295% at July 3, 1999)................ $ 27,500 $ --
Term A loans payable in varying installments through 2004
at LIBOR plus 3 (8.1% at July 3, 1999).................. 2,500 --
Term B loans payable in varying installments through 2006
at LIBOR plus 3.5 (8.795% at July 3, 1999).............. 37,500 --
Term B loans payable in varying installments through 2006
at LIBOR plus 3.5 (8.6% at July 3, 1999)................ 2,500 --
11.5% exchangeable subordinated debentures due 2009...... 100,000 --
PIDA second mortgage, payable in monthly installments,
interest at 2%.......................................... -- 1,503
Lease obligations and other.............................. 30 20
-------- ------
170,030 1,523
Less current portion..................................... 1,030 143
-------- ------
Long-term debt, less current portion..................... $169,000 $1,380
======== ======
</TABLE>
Aggregate annual maturities of long-term debt as of July 3, 1999 (in
thousands):
<TABLE>
<S> <C>
2000................................................................ $ 1,030
2001................................................................ 4,600
2002................................................................ 6,400
2003................................................................ 8,800
2004................................................................ 11,200
2005 and beyond..................................................... 138,000
--------
$170,030
========
</TABLE>
(11) Lease Obligations
The Company leases certain of its facilities under operating lease
agreements, some of which have renewal options.
Rental expense under operating lease agreements, net of sublease income, was
$0.9 million, $0.6 million and $0.3 million in 1999, 1998 and 1997,
respectively.
F-15
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease commitments under the Company's operating leases are as
follows as of July 3, 1999 (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ 2,277
2001................................................................. 2,048
2002................................................................. 2,002
2003................................................................. 2,004
2004 and after....................................................... 10,770
-------
$19,101
=======
</TABLE>
(12) Fair Value of Financial Instruments
Estimated fair value of financial instruments is provided in accordance with
the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents, accounts receivable and accounts payable--The
carrying amounts of these items approximate their fair values at July 3, 1999
due to the short-term maturities of these instruments.
Marketable securities--The estimated fair value of each held to maturity
investment approximates the amortized cost and as such no unrealized gain or
loss has been recorded.
Long-term debt--Interest rates that are currently available to the Company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which quoted market prices are not
available. The carrying value of this item is not materially different from its
fair value on July 3, 1999.
(13) Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended
--------------------------
June
July 3, 27, June 28,
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Current tax expense:
Federal......................................... $10,549 $11,685 $4,248
State........................................... 1,571 1,837 525
Foreign......................................... 195 35 --
------- ------- ------
Total current................................. $12,315 $13,557 $4,773
------- ------- ------
Deferred tax expense (benefit):
Federal......................................... $(6,907) $ (627) $1,299
State........................................... (88) (85) 242
------- ------- ------
Total deferred................................ (6,995) (712) 1,541
------- ------- ------
Total income tax expense...................... $ 5,320 $12,845 $6,314
======= ======= ======
</TABLE>
F-16
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended
-------------------------
July 3, June 27, June 28,
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Accounts receivable allowances...................... $ 759 $ 664 $ 171
Inventory valuation................................. 1,843 1,208 744
Disqualified disposition exercises of options....... 6,141 -- --
Net operating loss carry forward.................... 195 195 195
Capital loss carry forward.......................... 1,894 2,137 2,136
Basis in equity investment.......................... -- 692 692
Accrued expenses and other.......................... 529 318 291
------- ------ ------
Gross deferred tax assets......................... 11,361 5,214 4,229
Less: valuation allowance......................... 2,717 3,145 3,090
------- ------ ------
Deferred tax asset.................................. 8,644 2,069 1,139
Deferred tax liabilities:
Depreciation........................................ 501 1,018 899
Other............................................... 288 193 94
------- ------ ------
Deferred tax liabilities.......................... 789 1,211 993
------- ------ ------
Net deferred tax asset................................ $ 7,855 $ 858 $ 146
======= ====== ======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible amounts become
deductible.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, potential limitations with respect to the
utilization of loss carry forwards, and tax planning strategies in making this
assessment. Based upon the projections for future taxable income over the
periods which deferred tax assets are deductible and the potential limitations
of loss and credit carry forwards, management believes it is more likely than
not the Company will realize these deductible differences, net of existing
valuation allowances (both federal and state) at July 3, 1999. The Company
periodically reassesses and re-evaluates the status of its recorded deferred
tax assets.
F-17
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The actual tax expense differs from the "expected" tax expense computed by
applying the statutory Federal corporate income tax rate of 35% in all fiscal
years to income before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
---------------------------
July 3, June 27, June 28,
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Computed expected tax expense (benefit)........ $ 9,927 $11,977 $ (736)
State taxes (net of federal income tax
benefit)...................................... 964 1,248 228
Effect of lower foreign tax rates.............. (3,086) (1,012) --
Capital contribution........................... -- 346 --
Tax-exempt interest and dividends.............. -- (13) (29)
In-process research and development write-off.. -- -- 3,904
Loss in equity investments..................... -- -- 2,778
Loss from discontinued operations.............. -- -- 318
Gain from sale of Galaxy Power................. -- -- (174)
Utilization of capital loss carryforwards...... (3,233) -- --
Intangible amortization........................ 185 82 --
Other.......................................... 563 217 25
------- ------- ------
$ 5,320 $12,845 $6,314
======= ======= ======
</TABLE>
As of July 3, 1999, the Company has state operating loss carry forwards of
approximately $3.0 million expiring through 2008. The Company also has a
capital loss carry forward of approximately $4.9 million expiring in 2003. The
Company does not currently calculate deferred taxes on its investment in its
Singapore operations, as all undistributed earnings are permanently reinvested
back into the Singapore facility. If the Company were to record deferred taxes
on its investment, the amount would be a $4.3 million liability.
(14) Employee Benefit Plans
The Company has a bonus plan, which covers permanent full-time employees
with at least six months of service. Bonuses under this plan are based on the
Company achieving specified revenue and profit objectives and on individuals
meeting specified performance objectives. Amounts charged to expense for the
plan were $3.9 million, $3.6 million and $1.9 million in fiscal years 1999,
1998 and 1997, respectively.
The Company has a 401(k) employee savings plan, which provides for
contributions to be held in trust by corporate fiduciaries. Employees are
permitted to contribute up to 12 percent of their annual compensation. Under
the plan, the Company makes matching contributions equal to 150% of the first
1% contributed, 125% of the second 1% contributed, 100% of the third 1%
contributed, 75% of the fourth 1% contributed and 50% of the next 2% up to a
maximum of 6 percent of annual compensation, subject to IRS limits. The amounts
contributed by the Company and charged to expense were $0.5 in fiscal year
1999, $0.5 million in fiscal year 1998, and $0.3 million in fiscal year 1997.
(15) Stock Option Plans
Non-qualified stock options are granted at prices not less than the fair
market value at the date of grant, as determined by directors of the Company,
and become exercisable as determined by the Company's stock option committee,
generally over five years. Options can be granted for terms of up to ten years.
Incentive stock options have also previously been granted at fair market value.
F-18
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pre-Recapitalization
The Company had various stock option plans (the "Plans") under which key
employees and non-employee directors and consultants were granted incentive
stock options and non-qualified options.
The Company's 1997 Equity Compensation Plan ("the 1997 Plan") was approved,
ratified and adopted by shareholders at the Shareholders' Meeting on October
23, 1997.
Stock option transactions pre-recapitalization during fiscal years 1999,
1998 and 1997 are summarized as follows (in thousands, except price per share):
<TABLE>
<CAPTION>
Options Available Weighted
For Grant Under Options Average
Plans The Plans Outstanding Exercise Price
----- ----------------- ----------- --------------
<S> <C> <C> <C>
Balance June 29, 1996.......... 517 4,181 $6.27
Shares reserved.............. 508 -- --
Granted...................... (1,638) 1,638 7.21
Exercised.................... -- (1,784) 6.04
Terminated................... 679 (679) 6.54
------ ------ -----
Balance June 28, 1997.......... 66 3,356 $6.84
Additional shares reserved... 3,388 -- --
Granted...................... (715) 715 13.92
Exercised.................... -- (1,086) 6.33
Terminated................... 683 (681) 8.39
------ ------ -----
Balance June 27, 1998.......... 3,422 2,304 $8.74
Additional shares reserved... -- -- --
Granted...................... (1,166) 1,166 7.91
Exercised.................... -- (2,912) 7.56
Cancelled.................... (2,814) -- 9.96
Terminated................... 558 (558) 13.17
------ ------ -----
Balance July 3, 1999........... 0 0 $ 0
====== ====== =====
</TABLE>
During fiscal years 1998 and 1997, 1.02 million stock options were granted
to employees outside the plans described above at weighted exercise price of
$10.13, the fair market value at grant date, for terms of five years. Such
options are non-qualified and are not included in the above table but are
included in SFAS No. 123 pro forma disclosure that appears below.
Post-Recapitalization
The above plans were replaced on May 11, 1999. The 1999 Stock Option Plan
("the 1999 Plan") was approved, ratified and adopted at this time. These
options vest over five years and expire in May 11, 2009.
F-19
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock option transactions post-recapitalization during fiscal 1999 are
summarized as follows (in thousands, except price per share):
<TABLE>
<CAPTION>
Options Available Weighted
For Grant Under Options Average
1999 Plans The Plans Outstanding Exercise Price
---------- ----------------- ----------- --------------
<S> <C> <C> <C>
Common A Shares:
Balance June 27, 1998........... -- -- $ --
Shares reserved............... 11,070 -- --
Granted....................... (10,328) 10,328 0.54
Terminated.................... 47 (47) 0.67
------- ------ -----
Balance July 3, 1999............ 789 10,281 $0.54
======= ====== =====
Common L Shares:
Balance June 27, 1998........... -- -- $ --
Shares reserved............... 232 -- --
Granted....................... (232) 232 2.12
Terminated.................... -- -- --
------- ------ -----
Balance July 3, 1999............ -- 232 $2.12
======= ====== =====
</TABLE>
As of July 3, 1999, options for 2.4 million shares were exercisable at
weighted average exercise prices ranging from $0.026 to $2.12 at an aggregate
exercise price of $0.3 million. Income tax benefits attributable to non-
qualified stock options exercised and disqualifying dispositions of incentive
stock options are credited to equity when realized.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------
Outstanding Weighted Average Exercisable
Range of as of Remaining Weighted Average as of Weighted Average
Exercise Price 07/3/1999 Contractual Life Exercise Price 07/3/1999 Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.05--$0.21............ 7,551 9.9 $0.10 2,091 $0.02
$1.70--$1.91............ 2,729 9.9 $1.75 -- $ --
$1.91--$2.12............ 232 9.9 $2.12 232 $2.12
------ --- ----- ----- -----
10,512 9.9 $0.57 2,323 $0.24
====== === ===== ===== =====
</TABLE>
The Company applies APB 25 and related interpretations in accounting for
stock option plans. In connection with the recapitalization, the Company
recorded a compensation charge of $15.1 million relating to the acceleration of
the vesting period of employee outstanding stock options under the Company's
previous option plans.
Had compensation cost been recognized consistent with SFAS No. 123, the
Company's consolidated net earnings (loss) and earnings (loss) per share would
have been as follows (in thousands except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss) as reported.................. $ 23,043 $ 21,375 $ (8,419)
Pro forma...................................... 19,449 16,868 (10,405)
Net income (loss) per diluted share as
reported...................................... 0.86 0.96 (0.43)
Pro forma diluted net income (loss) per share.. 0.72 0.76 (0.54)
</TABLE>
The per share weighted-average fair value of stock options issued by the
Company was $1.30, $8.72, and $3.88 for fiscal years 1999, 1998 and 1997
respectively.
F-20
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following assumptions were used by the Company to determine the fair
value of stock options granted using the Black-Scholes option-pricing model:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
Dividend yield.................. 0% 0% 0%
Expected volatility............. Minimal value 60-81% 60-65%
Average expected option life.... 5 years 4 years 4 years
Risk-free interest rate......... 6.0% 5.34% to 6.4% 5.34% to 6.71%
</TABLE>
Pro forma net income (loss) reflects only options granted in fiscal years
1999, 1998 and 1997. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No.123 is not reflected in the pro forma net
income (loss) amounts presented above because compensation cost is reflected
over an option's vesting period, and compensation cost for options granted
prior to July 1, 1995 is not considered.
(16) Net Income (Loss) Per Share
The Company had adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires
the Company to report both basic net income (loss) per share, which is based on
the weighted-average number of common shares outstanding excluding contingently
issuable or returnable shares that contingently convert into Common Stock upon
certain events, and diluted net income (loss) per share, which is based on the
weighted average number of common shares outstanding and diluted potential
common shares outstanding. Class A Stock, Class B Stock and Class L Stock share
ratably in the net income (loss) remaining after giving effect to the 9% yield
on Class L Stock. Net income (loss) for year ended July 3, 1999 used in the net
income (loss) per share calculation represents the income (loss) attributable
to the weighted average number of shares of Class A Stock, Class B Stock and
Common Stock outstanding after giving effect to the 9% yield on Class L Stock.
The following tables set forth the computation of net income (numerator) and
shares (denominator) for earnings per share:
<TABLE>
<CAPTION>
Year Ended
-------------------------
July 3, June 27, June 28,
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Numerator (in thousands):
Net Income (loss)................................... $23,043 $21,375 $(8,419)
Less: Income attributable to Class L Stock.......... 530 -- --
------- ------- -------
$22,513 $21,375 $(8,419)
======= ======= =======
Denominator (in thousands):
Common Stock........................................ 20,690 20,912 19,439
Class A Stock....................................... 3,758 -- --
Class B Stock....................................... 1,364 -- --
------- ------- -------
Weighted average shares outstanding used for basic
income per share................................... 25,812 20,912 19,439
Common Stock Options................................ 466 1,352 --
------- ------- -------
Weighted average shares outstanding used for diluted
income per share................................... 26,278 22,264 19,439
======= ======= =======
</TABLE>
(17) Stockholders' Equity
The shares of Class A common stock entitle the holder to one vote per share
on all matters to be voted upon by shareholders. The Class B common stock and
Class L common stock are non-voting. The Class L common stock is identical to
the Class A common stock and Class B common stock except that the Class L
F-21
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
common stock will be entitled preference over the Class A common stock and the
Class B common stock, with respect to any distribution to holders of our common
stock, equal to the original cost of such share ($10.62) plus an amount which
accrues at a rate of 9% per annum, compounded quarterly. The Class L common
stock is convertible into Class A common stock upon an initial public offering.
Class A common stock is convertible into Class B common stock at any time, and
Class B common stock is convertible into Class A common stock at any time so
long as after giving effect to the conversion the converting Class B common
stock holders and their affiliates do not own more than 49.9% of the
outstanding shares of Class A common stock.
(18) Business Segment and Geographic Information
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which became effective for fiscal year
1999. The Company adopted the requirements of this statement in fiscal year
1999.
Revenue and long-lived assets by the Company's geographic locations are as
follows:
<TABLE>
<CAPTION>
Revenues by Geographic
Location
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
North America.................................. $ 46,702 $ 71,473 $ 48,100
Asia Pacific................................... 35,228 37,619 20,149
Europe......................................... 5,636 9,311 11,132
Taiwan......................................... 51,497 42,231 24,978
-------- -------- --------
$139,063 $160,634 $104,359
======== ======== ========
<CAPTION>
Long-Lived Assets
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States.................................. $ 9,099 $ 15,742 $ 13,692
Singapore...................................... 3,944 2,846 412
Elimination of Intercompany.................... (916) (704) --
-------- -------- --------
$ 12,127 $ 17,884 $ 14,104
======== ======== ========
</TABLE>
The Company has two reportable segments, core products and non-core
products. The core segment represents parts that synchronize the timing signals
in electronic devices. The non-core products included data communication
transceivers and custom components.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (see Note 1). The Company
evaluates the performance of these two segments based on their contribution to
operating income, excluding non-recurring gains or losses.
The Company's reportable segments are strategic product lines that differ in
nature and have different end uses, as such these product lines are managed and
reported to the chief operating decision maker separately.
Core products are standard application specific products that are sold into
a variety of applications. The Company's average selling prices tend to be
stable, gross margins are higher than commodity products, and the volumes
higher than the non-core segment. Two types of products characterize the non-
core segment. Data communications are transceivers used in network
applications. The custom parts are for different applications using varied
technologies. Each component in the custom product line is developed
specifically for one customer for their specific application.
F-22
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue, operating profit, depreciation and amortization and capital
expenditures by business segment were as follows:
<TABLE>
<CAPTION>
Business Segment Net
Revenue
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Core......................................... $ 107,710 $ 90,622 $ 63,280
Non-core..................................... 31,353 70,012 41,079
--------- -------- --------
Total net revenues......................... $ 139,063 $160,634 $104,359
========= ======== ========
<CAPTION>
Business Segment Profit
(Loss)
-----------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Core......................................... $ 22,783 $ 11,733 $ (1,835)
Non-core..................................... 10,674 20,567 6,686
Special charge............................... (15,051) -- --
--------- -------- --------
Total operating profit..................... 18,406 32,300 4,851
Reconciliation to statements of operations:
Gain on sale of Datacom...................... 10,734 -- --
Interest and other income.................... 2,178 1,984 1,800
Interest expense............................. (2,955) (64) (63)
Impairment on equity investment.............. -- -- (7,072)
Minority interest............................ -- -- 154
Equity loss of investee...................... -- -- (866)
--------- -------- --------
Net income (loss) before income taxes...... $ 28,363 $ 34,220 $ (1,196)
========= ======== ========
</TABLE>
The Company does not allocate items below operating income to specific
segments. The core and non-core profit is calculated as revenues less cost of
sales, research and development and selling, general and administrative
expenses for that segment. In addition, the Company does not allocate most of
its assets to specific segments, with the exception of certain property and
equipment, and accordingly has not presented a breakdown of assets by segments.
<TABLE>
<CAPTION>
Business Segment
Depreciation/Amortization
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Core............................................ $ 1,595 $ 1,494 $ 1,269
Non-core........................................ 326 529 478
Corporate and other............................. 3,044 2,556 1,997
-------- -------- --------
Total consolidated depreciation and
amortization................................. $ 4,965 $ 4,579 $ 3,744
======== ======== ========
<CAPTION>
Business Segment Capital
Expenditures
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Core............................................ $ 1,029 $ 1,509 $ 418
Non-core........................................ 279 760 299
Corporate and other............................. 6,386 5,870 2,641
-------- -------- --------
Total consolidated capital expenditures....... $ 7,694 $ 8,139 $ 3,358
======== ======== ========
</TABLE>
F-23
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(19) Related Party Transactions
On May 11, 1999, the Company entered into an advisory agreement with Bain
Capital Inc., a shareholder, for consulting services. The agreement provides
for the Company to pay Bain Capital Inc. $750,000 per year plus any reasonable
out of pocket expenses on a quarterly basis. The term of this agreement ends
May 11, 2009. In connection with the merger and recapitalization, the Company
paid $3.4 million to Bain Capital.
On May 11, 1999, the Company entered into an advisory agreement with Bear,
Stearns & Co. Inc., a shareholder, for consulting services. The agreement
provides for the Company to pay Bear, Stearns & Co. Inc. $250,000 per year plus
any reasonable out of pocket expenses on a quarterly basis. The term of this
agreement ends May 11, 2009. In connection with the merger and
recapitalization, the Company paid $4.9 million to Bear, Stearns & Co.
On May 11, 1999, certain members of our senior management team entered into
deferred compensation agreements with the Company. The agreements expire on May
11, 2009 upon which time the Company will pay the executives the entire
deferred compensation regardless of their employment status at the Company. If
a sale of the Company is consummated prior to expiration of the agreements, the
executives will receive full benefit amount at that date. If there is a
consummation of a Qualified Initial Public Offering ("QIPO date") prior to
expiration the executive will receive 50% of the benefit on that date and the
remaining 50% is payable on the date one year after the QIPO date. The amount
of deferred compensation as of July 3, 1999 was $0.5 million.
On May 11, 1999, the Company entered into an employment agreement with Hock
E. Tan, as CEO and President with a base salary of $250,000 per year. In
addition to his salary, Mr. Tan is eligible to earn an annual bonus of up to
120% of his base salary based upon the Company attaining certain performance
targets established annually by the board of directors.
On May 11, 1999, certain members of the management team entered into stock
purchase agreements. In exchange for the purchase of Class A common shares and
Class L common shares the executives delivered to the Company a promissory
note. The notes accrue interest at 8% per annum and mature on May 11, 2006. The
executives may prepay the notes at any time, in whole or increments of $1,000.
If the executives receive a bonus from the Company, the executives have the
obligation to pay the Company an amount equal to 50% of the amount of such
bonus, net of the amount of any customary withholding taxes and such amount
paid to the Company shall first reduce accrued interest and any remaining
amount paid to the Company shall reduce the principal amount. The outstanding
amounts as of July 3, 1999 was $0.5 million.
On May 11, 1999, the Company entered into a consulting agreement with Henry
Boreen, a board member, for consulting services. The agreement provides for the
Company to pay Mr. Boreen $350,000 per year in monthly installments. The term
of the consulting agreement ends on May 11, 2002.
The Company previously entered into an employment agreement with Henry
Boreen on May 6, 1998 to serve as the Company's interim CEO until September 11,
1998. Mr. Boreen's base compensation was $10,000 per month, plus a grant of
84,710 stock options at an exercise price at fair market price at date of
grant, which immediately vested. On September 14, 1998, the Company made an
amendment to this agreement to extend the term to December 31, 1998. The
amendment also increased Mr. Boreen's base compensation to $12,000 per month
plus a grant of 50,826 stock options at an exercise price of fair value at the
date of grant. Those options vested immediately. Also, in the first quarter of
fiscal year 1997, the Company and Henry I. Boreen, Chairman of the Board,
entered into an employment agreement as Interim Chief Executive Officer. For
his services in this
F-24
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
capacity, Mr. Boreen received a grant of 127,065 stock options at an exercise
price of $6.13 per share which was equal to the closing price on the date of
grant, and which option had a term of ten years and became exercisable in
monthly installments over the six month period following the date of grant.
On January 11, 1999, the Company entered into an employment agreement with
Rudolf Gassner as the Company's Chairman of the Board. The employment period
was for one year commencing on January 1, 1999. Mr. Gassner's responsibilities
included finding a suitable candidate to serve as the Company's Chief Executive
Officer, and management of day-to-day operations of the Company until a
suitable Chief Executive Officer is secured. The agreement provided for the
Company to pay Mr. Gassner a salary at a monthly rate of $12,000 during the
employment term. Mr. Gassner was also entitled to participate in the Company's
incentive compensation plan. This agreement terminated May 11, 1999.
On November 3, 1998, the Company granted Mr. Gassner an option to purchase
189,750 shares of the Company's common stock at $8.19 per share, equal to fair
market value on the grant date. The options vest and become exercisable on a
cumulative basis at a rate of 13,554 shares per month commencing on November
30, 1998, with vesting on December 31, 1999. On November 3, 1998 the Company
granted Mr. Gassner an option to purchase an additional 169,420 shares of the
Company's common stock at $8.19, the fair market value on the grant date. These
options vest and become exercisable on a cumulative basis at the rate of 33,884
shares per year commencing on the first anniversary of the grant date, with
full vesting on November 3, 2003, and earlier vesting in full in the event the
price of the Company's common stock exceeds $11.80 for 10 consecutive trading
days. This agreement terminated May 11, 1999.
In the third quarter of fiscal 1998, the Company entered into a severance
agreement with Stavro Prodromou, the former President and Chief Executive
Officer. Dr. Prodromou received $135,000 in cash severance and health benefits
at the time of his departure, and was granted up to a one-year period to
exercise 211,775 of his stock options. His remaining options were canceled.
On May 11, 1998, each non-employee director entered into a consulting
agreement with the Company for management consulting services. The term of each
of the consulting agreement ended on December 31, 1998, and to the extent
service (not to exceed ten days per month) of any such director were to be
retained, he would receive cash compensation of $2,000 per day. There were no
expenses incurred under this agreement in fiscal year 1999.
In the first quarter of fiscal year 1997, the Company and David Sear, the
former President and Chief Executive Officer, entered into a severance
agreement. The Company recorded a charge of $0.3 million in connection with
this agreement.
(20) Financial Information for Guarantor Subsidiaries and Non-Guarantor
Subsidiaries
The Company conducts substantially all of its business through its domestic
and foreign subsidiaries. On May 11, 1999, the Company issued $100.0 million
principal amount of Notes bearing interest at a rate of 11.5%. The proceeds
from the issuance of the Notes together with borrowings under a senior credit
facility were used to pay transaction costs associated with the
recapitalization of the Company and fund a portion of the cash consideration
payable in connection with the merger.
Presented below is condensed consolidating financial information for
Integrated Circuit Systems, Inc., which includes the activities of the
guarantor subsidiaries and the wholly owned foreign subsidiary (the "Non-
Guarantor Subsidiary") as of July 3, 1999 and June 27, 1998 and for the fiscal
years ended July 3, 1999, June 27, 1998 and June 28, 1997. The condensed
consolidating financial information has been presented to show the nature of
the assets held, results of operations and cash flows of the Parent Company,
Guarantor subsidiaries
F-25
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and the Non-Guarantor subsidiary assuming the guarantee structure of the Notes
was in effect as the beginning of the periods presented. Separate financial
statements for Guarantor Subsidiaries are not presented based on management's
determination that they would not provide additional information that is
material to investors.
The condensed consolidating financial information reflects the investments
of the Parent Company in the Guarantor and Non-Guarantor Subsidiaries using the
equity method of accounting. In addition, corporate interest has not been
allocated to the subsidiaries.
F-26
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
July 3, 1999
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 3,034 $ 2,661 $ 3,590 $ -- $ 9,285
Accounts receivable,
net.................... 12,730 -- 5,390 -- 18,120
Inventory............... 3,033 3,419 2,284 -- 8,736
Other current assets.... 10,858 2,938 429 -- 14,225
Property and equipment,
net.................... 1,261 7,838 3,944 (916) 12,127
Deferred financing
charges................ 12,767 -- -- -- 12,767
Investment in
subsidiaries........... 58,828 -- -- (58,828) --
Intercompany
receivables............ 5,920 45,238 -- (51,158) --
Other assets............ 6,433 1,152 4,950 -- 12,535
--------- ------- ------- --------- ---------
Total assets.......... $ 114,864 $63,246 $20,587 $(110,902) $ 87,795
========= ======= ======= ========= =========
Liabilities and
shareholders' equity
(deficit):
Current liabilities,
exclusive of debt...... $ 5,715 $14,811 $ 1,900 $ -- $ 22,426
Current portion of long-
term debt.............. 1,000 30 -- -- 1,030
Long-term debt less
current................ 169,000 -- -- -- 169,000
Other non-current
liabilities............ 1,648 603 -- -- 2,251
Intercompany payable.... 44,413 968 5,777 (51,158) --
Shareholders' equity
(deficit).............. (106,912) 46,834 12,910 (59,744) (106,912)
--------- ------- ------- --------- ---------
Total liabilities and
shareholders' equity
(deficit)............ $ 114,864 $63,246 $20,587 $(110,902) $ 87,795
========= ======= ======= ========= =========
</TABLE>
F-27
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
June 27, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents............ $ 4,573 $ 16,413 $ 4,354 $ -- $ 25,340
Accounts receivable,
net.................... 17,242 -- 3,093 -- 20,335
Inventory............... 4,320 5,741 2,778 -- 12,839
Other current assets.... 2,237 18,814 131 1,067 22,249
Property and equipment,
net.................... 11,804 3,938 2,846 (704) 17,884
Investment in
subsidiaries........... 90,591 -- -- (90,591) --
Intercompany
receivables............ 16,057 3,677 -- (19,734) --
Other assets............ 7,975 1,387 -- -- 9,362
-------- -------- ------- --------- --------
Total assets.......... $154,799 $ 49,970 $13,202 $(109,962) $108,009
======== ======== ======= ========= ========
Liabilities and
shareholders' equity
(deficit):
Current liabilities,
exclusive of debt...... $ (1,016) $ 13,525 $ 2,830 $ 168 $ 15,507
Current portion of long-
term debt.............. 123 20 -- -- 143
Other non-current
liabilities............ 2,138 453 -- -- 2,591
Intercompany payable.... 63,786 (51,717) 6,775 (18,844) --
Shareholders' equity
(deficit).............. 89,768 87,689 3,597 (91,286) 89,768
-------- -------- ------- --------- --------
Total liabilities and
shareholders' equity
(deficit)............ $154,799 $ 49,970 $13,202 $(109,962) $108,009
======== ======== ======= ========= ========
</TABLE>
F-28
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Year Ended July 3, 1999
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 29,653 $89,936 $36,771 $(17,297) $139,063
Cost of sales........... 11,188 47,240 20,129 (14,061) 64,496
Research and
development............ 4,588 11,934 2,813 1,981 21,316
Selling, general and
administrative......... 12,950 7,513 4,675 (5,344) 19,794
Compensation costs...... 15,051 -- -- -- 15,051
-------- ------- ------- -------- --------
Operating income
(loss)................. (14,124) 23,249 9,154 127 18,406
Sale of Datacom......... (7,734) (3,000) -- -- (10,734)
Other (income) expense.. 1,224 (3,381) (232) 211 (2,178)
Interest expense........ 2,934 3 18 -- 2,955
-------- ------- ------- -------- --------
Income (loss) before
income taxes........... (10,548) 29,627 9,368 (84) 28,363
Income tax expense
(benefit).............. (6,032) 11,159 56 137 5,320
-------- ------- ------- -------- --------
Net income (loss)..... $ (4,516) $18,468 $ 9,312 $ (221) $ 23,043
======== ======= ======= ======== ========
</TABLE>
F-29
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Year Ended June 27, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $52,977 $105,397 $15,753 $(13,493) $160,634
Cost of sales........... 28,948 58,913 9,002 (8,004) 88,859
Research and
development............ 5,829 10,852 1,328 1,788 19,797
Selling, general and
administrative......... 14,579 9,905 2,485 (7,291) 19,678
------- -------- ------- -------- --------
Operating income........ 3,621 25,727 2,938 14 32,300
Other (income) expense.. (117) (2,577) 6 704 (1,984)
Interest expense........ 63 1 -- -- 64
------- -------- ------- -------- --------
Income (loss) before
income taxes........... 3,675 28,303 2,932 (690) 34,220
Income tax expense...... 1,779 11,051 10 5 12,845
------- -------- ------- -------- --------
Net income (loss)..... $ 1,896 $ 17,252 $ 2,922 $ (695) $ 21,375
======= ======== ======= ======== ========
</TABLE>
F-30
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED STATEMENT OF OPERATIONS
Year Ended June 28, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................ $32,917 $67,179 $6,801 $(2,538) $104,359
Cost of sales........... 16,224 36,590 6,196 127 59,137
Research and
development............ 4,108 8,196 287 930 13,521
Selling, general and
administrative......... 11,166 7,145 1,558 (4,215) 15,654
Write-off of in process
research and
development............ -- 11,196 -- -- 11,196
------- ------- ------ ------- --------
Operating income
(loss)................. 1,419 4,052 (1,240) 620 4,851
Other (income) expense.. 7,249 (1,148) 37 (154) 5,984
Interest expense........ 61 2 -- -- 63
------- ------- ------ ------- --------
Income (loss) before
income taxes........... (5,891) 5,198 (1,277) 774 (1,196)
Income tax expense
(benefit).............. 152 6,607 (445) -- 6,314
------- ------- ------ ------- --------
Income (loss) from
continuing operations.. (6,043) (1,409) (832) 774 (7,510)
Loss from discontinued
operations............. (909) -- -- -- (909)
------- ------- ------ ------- --------
Net income (loss)..... $(6,952) $(1,409) $ (832) $ 774 $ (8,419)
======= ======= ====== ======= ========
</TABLE>
F-31
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
July 3, 1999
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
--------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ (4,516) $ 18,468 $ 9,312 $ (221) $ 23,043
Depreciation and
amortization......... 2,001 2,156 903 (95) 4,965
Other non-cash items.. (13,388) (3,856) -- -- (17,244)
Working capital
changes.............. (1,081) 18,497 (3,740) 10 13,686
--------- -------- ------- ------- ---------
Net cash flows from
operating activities... (16,984) 35,265 6,475 (306) 24,450
Capital expenditures.. (912) (6,301) (2,009) 1,528 (7,694)
Sales, maturities &
purchases of
investments.......... -- 16,112 (288) -- 15,824
Other investing
activities........... 18,225 484 (4,942) (1,222) 12,545
--------- -------- ------- ------- ---------
Net cash flows from
investing activities... 17,313 10,295 (7,239) 306 20,675
Proceeds from long-
term debt............ 170,000 30 -- -- 170,030
Recapitalization...... (187,782) (59,322) -- -- (247,104)
Investments from
equity investors..... 30,655 -- -- -- 30,655
Payments of long term
debt................. (93) (21) -- -- (114)
Purchase of treasury
stock................ (3,016) -- -- -- (3,016)
Other financing
activities........... (11,631) -- -- -- (11,631)
--------- -------- ------- ------- ---------
Net cash flows from
financing activities... (1,867) (59,313) -- -- (61,180)
--------- -------- ------- ------- ---------
Change in cash.......... (1,538) (13,753) (764) -- (16,055)
Beginning balance....... 4,572 16,414 4,354 -- 25,340
--------- -------- ------- ------- ---------
Ending balance........ $ 3,034 $ 2,661 $ 3,590 $ -- $ 9,285
========= ======== ======= ======= =========
</TABLE>
F-32
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
June 27, 1998
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ 1,221 $ 17,927 $ 2,922 $(695) $ 21,375
Depreciation and
amortization......... 2,437 1,762 467 (87) 4,579
Other non-cash items.. (162) 81 -- -- (81)
Working capital
changes.............. 1,106 (8,347) 3,723 (10) (3,528)
-------- -------- ------- ----- --------
Net cash flows from
operating activities... 4,602 11,423 7,112 (792) 22,345
Capital expenditures.. (3,945) (2,225) (2,905) 936 (8,139)
Sales, maturities &
purchases of
investments.......... -- (8,072) -- -- (8,072)
Other investing
activities........... 2,833 29 3 (144) 2,721
-------- -------- ------- ----- --------
Net cash flows from
investing activities... (1,112) (10,268) (2,902) 792 (13,490)
Payments of long term
debt................. (141) (45) -- -- (186)
Purchase of treasury
stock................ (12,993) -- -- -- (12,993)
Exercise of stock
options.............. 7,015 -- -- -- 7,015
Other financing
activities........... 4,224 -- -- -- 4,224
-------- -------- ------- ----- --------
Net cash flows from
financing activities... (1,895) (45) -- -- (1,940)
-------- -------- ------- ----- --------
Change in cash.......... 1,595 1,110 4,210 -- 6,915
Beginning balance....... 2,977 15,304 144 -- 18,425
-------- -------- ------- ----- --------
Ending balance.......... $ 4,572 $ 16,414 $ 4,354 $ -- $ 25,340
======== ======== ======= ===== ========
</TABLE>
F-33
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SUPPLEMENTAL CONDENSED STATEMENT OF CASH FLOWS
June 28, 1997
(In thousands)
<TABLE>
<CAPTION>
Non-
Parent Guarantor Guarantor Eliminating
Company Subsidiaries Subsidiaries Entries Consolidated
-------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss)....... $ (6,932) $ (259) $(846) $(382) $ (8,419)
Depreciation and
amortization......... 2,491 1,172 81 -- 3,744
Other non-cash items.. 9,706 11,300 83 (308) 20,781
Working capital
changes.............. 8,339 (14,749) 11 690 (5,709)
-------- -------- ----- ----- --------
Net cash flows from
operating activities... 13,604 (2,536) (671) -- 10,397
Capital expenditures.. (1,680) (1,261) (417) -- (3,358)
Sales, maturities &
purchases of
investments.......... -- (7,872) -- -- (7,872)
Other investing
activities........... (8,583) 37 502 -- (8,044)
-------- -------- ----- ----- --------
Net cash flows from
investing activities... (10,263) (9,096) 85 -- (19,274)
Payments of long term
debt................. (136) (2) -- -- (138)
Purchase of treasury
stock................ (10,466) -- -- -- (10,466)
Exercise of stock
options.............. 10,807 -- -- -- 10,807
Other financing
activities........... (277) -- -- -- (277)
-------- -------- ----- ----- --------
Net cash flows from
financing activities... (72) (2) -- -- (74)
-------- -------- ----- ----- --------
Change in cash.......... 3,269 (11,634) (586) -- (8,951)
Beginning balance....... (292) 26,938 730 -- 27,376
-------- -------- ----- ----- --------
Ending balance.......... $ 2,977 $ 15,304 $ 144 $ -- $ 18,425
======== ======== ===== ===== ========
</TABLE>
F-34
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(21) Litigation
On January 27, 1999, Harbor Finance Partners and John P. McCarthy Money
Purchase Plan filed a complaint on behalf of a purported class of our
shareholders in the Court of Common Pleas of Montgomery County, Pennsylvania
against the Company and Mr. Henry I. Boreen in the capacity as our interim
Chief Executive Officer alleging that the consideration to be paid in the
merger is inadequate and seeking to enjoin the merger as well as unspecified
compensatory damages. In March 1999, the plaintiffs amended their complaint to
add Mr. Hock E. Tan as a defendant in his capacity as our Senior Vice
President, Chief Financial Officer and Secretary. In September 1999, the
plaintiffs dismissed their complaints without requiring any payments or other
consideration from the Company or any of the other defendants.
On July 31, 1998, Lemelson Medical, Education & Research Foundation, L.P.
("Lemelson") filed a patent infringement action in the U.S. District Court for
the District of Arizona against over 20 companies, including the Company. This
litigation involves 16 patents, all derived from an original 1954 filing.
Lemelson claims that the patents cover a number of aspects of semiconductor
chip manufacturing, in particular optical imaging using alignment marks on the
semiconductor chips, on assembly of the chips into packages, as well as bar-
coding for inventory control. The liability of the Company is alleged under the
U.S. Process Patent Act, which makes a seller of goods liable for a process
abroad that would infringe a U.S. patent if made here. A few of ICS' foundries
are already licensed under the patents, thus reducing the potential liability
of the Company. Some of the defendants have settled with Lemelson, and the
Company is currently in settlement discussions with Lemelson.
On July 2, 1999, Motorola, Inc. filed an action against the Company and four
former employees of Motorola in the Superior Court of Arizona, Maricopa County,
for unfair competition, breach of contract, misappropriation of trade secrets
and intentional interference with contractual relations. The four former
employees left Motorola and began employment with the Company in May 1999.
Motorola is seeking an injunction to prevent the Company from employing the
former Motorola employees for a reasonable period of time and to enjoin the
Company from using Motorola's trade secrets. Motorola is also suing to recover
its attorneys' fees, unspecified damages and other relief in this matter.
In addition to the foregoing, from time to time, various inquiries,
potential claims and charges and litigation (collectively "claims") are made,
asserted or commenced by or against the Company, principally arising from or
related to contractual relations and possible patent infringement. The Company
believes that any such claims currently pending, and the other litigation
matters discussed above, individually and in the aggregate, have been
adequately reserved and will not have any material adverse effect on the
Company's consolidated financial position or results of operations, although no
assurance can be made in this regard.
(22) Major Customers
During fiscal year 1999, Maxtek Technology represented 12% of the Company's
revenues. During fiscal years 1998 and 1997, no customer represented 10% or
more of the Company's revenues.
(23) Quarterly Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the years ended July 3, 1999 and June 27, 1998 (in thousands):
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------------
September 26 December 26 March 27 July 3 September 27 December 27 March 28 June 27
1998 1998 1999 1999 1997 1997 1998 1998
------------ ----------- -------- ------- ------------ ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $32,200 $35,815 $34,980 $36,068 $38,585 $43,045 $43,545 $35,459
Cost of sales........... 17,259 18,334 14,582 14,321 21,052 23,457 23,977 20,373
Research and
development............ 4,760 5,434 6,241 4,881 4,236 5,321 5,540 4,700
Operating income
(loss)................. 5,582 6,157 9,493 (2,826) 8,143 9,137 9,070 5,950
Net income (loss)....... $ 4,149 $ 4,512 $16,510 $(2,128) $ 5,042 $ 6,021 $ 6,208 $ 4,104
</TABLE>
F-35
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC..
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(24) Subsequent Event
On March 27, 2000, the Company's Board of Directors authorized the filing of
a Registration Statement on Form S-1 in connection with a planned initial
public offering of the Company's common stock. The Company intends to
reclassify all of its classes of common stock into a single class of common
stock and effect a stock split in the form of a stock dividend in the amount of
1.6942 shares for every one share outstanding as of the pricing date of the
initial public offering. All share and per share information in the
accompanying consolidated financial statements have been retroactively adjusted
to give effect to the planned modification of the Company's capital structure.
F-36
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................. $ 24,483 $ 9,285
Marketable securities................................. 284 288
Accounts receivable, net.............................. 18,397 18,120
Inventory, net........................................ 8,396 8,736
Deferred income taxes................................. 8,695 8,644
Prepaid assets........................................ 2,139 797
Other current assets.................................. 941 523
Current portion of deposit on purchase contracts...... 3,973 3,973
--------- ---------
Total current assets................................ 67,308 50,366
--------- ---------
Property and equipment, net............................. 12,534 12,127
Deferred financing costs, net........................... 12,173 12,767
Deposits on purchase contracts.......................... 10,578 11,348
Other assets............................................ 1,249 1,187
--------- ---------
Total assets........................................ $ 103,842 $ 87,795
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term obligations.............. $ 2,030 $ 1,030
Accounts payable...................................... 12,707 10,258
Income tax payable.................................... 4,528 4,473
Accrued payroll and bonus............................. 1,851 2,056
Accrued interest...................................... 1,842 2,108
Accrued expenses and other current liabilities........ 4,635 3,531
--------- ---------
Total current liabilities........................... 27,593 23,456
--------- ---------
Long-term debt, less current portion.................... 154,623 169,000
Other liabilities....................................... 1,409 1,462
Deferred income taxes................................... 1,116 789
--------- ---------
Total liabilities................................... 184,741 194,707
========= =========
Shareholders' deficit: (Note 10)
Series A preferred stock, $4.00 par, authorized 3,367;
Issued and outstanding
3,367 shares as of January 1, 2000................... 13,467 --
Class A common stock, $0.01 par, authorized 52,520;
Issued and outstanding 27,970 and 26,452 shares as of
January 1, 2000 and July 3, 1999, respectively....... 280 264
Class B common stock, $0.01 par, authorized 52,520;
Issued and outstanding 9,577 shares as of January 1,
2000 and July 3, 1999, respectively.................. 96 96
Class L common stock, $0.01 par, authorized 6,777;
Issued and outstanding
4,003 shares as of January 1, 2000 and July 3, 1999,
respectively ........................................ 40 40
Additional paid in capital............................ 34,640 34,556
Accumulated deficit................................... (129,026) (141,413)
Notes receivable...................................... (396) (455)
--------- ---------
Total shareholders' deficit......................... (80,899) (106,912)
--------- ---------
Total liabilities and shareholders' deficit......... $ 103,842 $ 87,795
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
----------------------- -----------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Revenues:..................... $41,058 $35,815 $78,898 $68,015
Cost and expenses:
Cost of sales............... 17,095 18,334 32,870 35,593
Research and development
expense.................... 5,781 5,434 11,721 10,194
Selling, general and
administrative expense..... 6,687 5,832 11,127 10,372
Management fee.............. 250 -- 500 --
Goodwill amortization....... 58 58 117 117
------- ------- ------- -------
Operating income.......... 11,187 6,157 22,563 11,739
------- ------- ------- -------
Interest and other (income)... (232) (644) (369) (1,418)
Interest expense.............. 4,549 14 9,312 64
------- ------- ------- -------
Income before income
taxes.................... 6,870 6,787 13,620 13,093
Income taxes.................. 71 2,275 1,403 4,432
------- ------- ------- -------
Income before extraordinary
items...................... 6,799 4,512 12,217 8,661
Extraordinary gain on early
retirement of bonds, net of
taxes........................ 134 -- 170 --
------- ------- ------- -------
Net income................ $ 6,933 $ 4,512 $12,387 $ 8,661
======= ======= ======= =======
Income per common share:
Basic income per common
share...................... $ 0.16 $ 0.22 $ 0.29 $ 0.42
Diluted income per common
share...................... $ 0.16 $ 0.22 $ 0.29 $ 0.41
Shares used to compute income
per common share
Basic....................... 36,110 20,651 36,035 20,768
Diluted..................... 36,339 20,905 36,149 20,971
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
January 1, December 26,
2000 1998
---------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 12,387 $ 8,661
Adjustments to reconcile net income to net Cash
provided by operating activities:
Depreciation and amortization...................... 2,253 2,697
Amortization of deferred financing charge.......... 796 --
Loss (gain) on sale of fixed assets................ 61 (320)
(Gain) loss on sale of building.................... (52) --
Loss on disposition of assets...................... -- 311
Purchase of trading securities..................... -- (13,535)
Sale of trading securities......................... -- 14,300
Tax benefit from the exercise of stock options..... 61 (3)
Deferred income taxes.............................. 275 (936)
Accounts receivable................................ (277) 780
Inventory.......................................... 340 5,940
Other assets, net.................................. (1,877) 18
Accounts payable, accrued expenses and other
current liabilities............................... 3,348 (3,585)
Accrued interest expense........................... (266) --
Income taxes....................................... 54 482
-------- --------
Net cash provided by operating activities.............. 17,103 14,810
-------- --------
Cash flows from investing activities:
Purchase of investments.............................. -- (19,926)
Proceeds from sale/maturities of marketable
securities.......................................... -- 18,323
Capital expenditures................................. (2,608) (4,245)
Change in deposits on purchase contracts............. 769 (12,000)
Proceeds from sale of fixed assets................... 60 15
-------- --------
Net cash used in investing activities............ (1,779) (17,833)
-------- --------
Cash flows from financing activities:
Exercise of stock options............................ 39 53
Investment into the Company.......................... 13,467 --
Repayments of long-term debt......................... (13,430) (76)
Repurchase of common stock........................... -- (3,016)
Deferred financing charges........................... (202) --
-------- --------
Net cash used in financing activities............ (126) (3,039)
-------- --------
Net increase in cash and cash equivalents.............. 15,198 (6,062)
Cash and cash equivalents:
Beginning of period.................................. 9,285 25,340
-------- --------
End of period........................................ $ 24,483 $ 19,278
======== ========
Supplemental disclosures of cash flow information:
Cash payments during the period for:
Interest........................................... $ 8,565 $ 64
======== ========
Income taxes....................................... $ 922 $ 4,743
======== ========
Non-cash disclosures:
Capital lease of equipment......................... $ 53 $ --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Interim Accounting Policy
The accompanying financial statements have not been audited. In the opinion
of the Company's management, the accompanying consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the Company's financial position at January 1, 2000
and results of operations and cash flows for the interim periods presented.
Certain items have been reclassified to conform to current period presentation.
Certain footnote information has been condensed or omitted from these
financial statements. Therefore, these financial statements should be read in
conjunction with the consolidated financial statements and related notes
appearing elsewhere herein. Results of operations for the three and six months
ended January 1, 2000 are not necessarily indicative of results to be expected
for the full year.
(2) Consolidation Policy
The accompanying consolidated financial statements include the accounts of
the Company and all of its subsidiaries (wholly and majority-owned), after
elimination of all significant intercompany accounts and transactions.
(3) Inventory
Inventory is valued at the lower of market or standard cost, which
approximates actual costs using the first-in, first-out (FIFO) method.
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
January 1, July 3,
2000 1999
---------- -------
<S> <C> <C>
Work-in-process.......................................... $ 7,328 $ 8,211
Finished parts........................................... 5,638 5,665
Less: Obsolescence reserve............................... (4,570) (5,140)
------- -------
$ 8,396 $ 8,736
======= =======
</TABLE>
(4) Recapitalization
On May 11, 1999, the Company merged with ICS Merger Corp., a transitory
merger company formed and wholly owned by the affiliates of Bain Capital Inc.
and Bear, Stearns and Company Inc. (the "Equity Investors"). The following
events, which collectively are referred to as the recapitalization, provided
the consideration for the redemption and purchase of the Company's outstanding
shares of common stock and vested options, together with the payment of fees
and expenses, totaling $294.4 million that took place on May 11, 1999:
. An equity investment of $30.6 million made by the Equity Investors and
certain other investors in ICS Merger Corp.;
. Direct purchases by Bain Capital of its common stock from certain
existing shareholders for $9.6 million;
. A rollover equity investment by certain members of its senior management
team of $9.8 million, consisting primarily of:
. Certain existing common stock ($6.6 million that was converted into
its new common stock after the merger);
F-40
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. Certain existing stock that was converted into new stock options
after the merger ($2.2 million) and deferred compensation agreements
($0.5 million); and
. Purchases of new common stock ($0.5 million) in exchange for
promissory notes;
. Borrowing of $70.0 million in term loans and $3.9 million under a $25.0
million revolving line of credit;
. The offering of $100.0 million in senior subordinated notes (the
"Notes"); and
.The use of cash on-hand of approximately $70.5 million.
(5) Debt
The Company paid down the principal amount of $8.1 million in September
1999, and $5.3 million in November 1999. The Company purchased $2.0 million of
its 11 1/2% senior subordinated notes below par in September, resulting in a
gain of $36,000 net of income taxes, and $5.0 million below par in November,
resulting in a gain of $134,000 net of income taxes. The gain on the early
retirement of bonds is reported as an extraordinary item, net of income tax. In
September, the Company paid $6.1 million of principal on its term A and B loans
and $0.3 million in November, as well as $8.6 million in interest during the
first six month of fiscal year 2000.
Certain of the Company's loan agreements require the maintenance of
specified financial ratios and impose financial limitations. At January 1,
2000, the Company was in compliance with the senior credit facility covenants.
(6) Net Income Per Share
The Company had adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires
the Company to report both basic net income per share, which is based on the
weighted-average number of common shares outstanding excluding contingently
issuable or returnable shares that contingently convert into Common Stock upon
certain events, and diluted net income per share, which is based on the
weighted average number of common shares outstanding and diluted potential
common shares outstanding. Class A Stock, Class B Stock and Class L Stock share
ratably in the net income (loss) remaining after giving effect to the 9% yield
on Class L Stock. Net income for the three and six months ended January 1, 2000
used in the net income per share calculation represents the income attributable
to the weighted average number of shares of Class A Stock, Class B Stock and
Common Stock outstanding after giving effect to the 9% yield on Class L Stock.
F-41
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following tables set forth the computation of net income (numerator) and
shares (denominator) for earnings per share:
<TABLE>
<CAPTION>
Three Months
Ended Six Months Ended
---------------- -----------------
January
1, December January December
2000 26, 1998 1, 2000 26, 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator (in thousands):
Net Income................................. $ 6,933 $4,512 $ 12,387 $ 8,661
Less: Income attributable to Class L
Stock..................................... 995 -- 1,961 --
------- ------ -------- -------
5,938 4,512 10,426 8,661
Denominator (in thousands):
Common Stock............................... -- 20,651 -- 20,768
Class A Stock.............................. 26,533 -- 26,458 --
Class B Stock.............................. 9,577 -- 9,577 --
------- ------ -------- -------
Weighted average shares outstanding used
for basic income per share................ 36,110 20,651 36,035 20,768
Common Stock Options....................... -- 254 -- 203
Series A Preferred Stock................... 229 -- 114 --
------- ------ -------- -------
Weighted average shares outstanding used
for diluted income per share.............. 36,339 20,905 36,149 20,971
======= ====== ======== =======
</TABLE>
(7) Equity
During December 1999, the Company received $13.5 million in exchange for 3.4
million shares of $4.00 par value preferred stock from a strategic corporate
investor.
(8) Business Segment Information
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which became effective for fiscal year
1999. The Company adopted the requirements of this statement in fiscal year
1999.
The Company has two reportable segments, core products and non-core
products. The core segment represents parts that synchronize the timing signals
in electronic devices. The non-core products include data communication
transceivers and custom components.
The Company's reportable segments are strategic product lines that differ in
nature and have different end uses. As such these product lines are managed and
reported to the chief operating decision-maker separately.
Core products are standard application specific products that are sold into
a variety of applications. The average selling prices (ASP's) tend to be
stable, gross margins are higher than commodity products, and the volumes
higher than the non-core segment. The non-core segment is made up of custom
parts using varied technologies for different applications such as
transceivers. Each component in the custom product line is developed
specifically for one customer for their specific application.
F-42
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue and operating profit by business segment were as follows:
<TABLE>
<CAPTION>
Business Segment Net Revenue
-----------------------------------------------
Three months ended Six months ended
----------------------- -----------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Core....................... $37,441 $26,952 $69,833 $51,059
Non-core................... 3,617 8,863 9,065 16,956
------- ------- ------- -------
Total net revenues....... $41,058 $35,815 $78,898 $68,015
======= ======= ======= =======
<CAPTION>
Business Segment Profit (Loss)
-----------------------------------------------
Three months ended Six months ended
----------------------- -----------------------
January 1, December 26, January 1, December 26,
2000 1998 2000 1998
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Operating Profit:
Core....................... $10,449 $ 4,760 $19,889 $ 9,004
Non-core................... 988 1,397 3,174 2,735
Management fee............. (250) -- (500) --
------- ------- ------- -------
Total operating profit... 11,187 6,157 22,563 11,739
Reconciliation to
statements of operations:
Interest & other income.... 232 644 369 1,418
Interest expense........... (4,549) (14) (9,312) (64)
------- ------- ------- -------
Net income (loss) before
Income taxes.............. $ 6,870 $ 6,787 $13,620 $13,093
======= ======= ======= =======
</TABLE>
The Company does not allocate items below operating income to specific
segments. The core and Non-core profit is calculated as revenues less cost of
sales, research and development and selling, general and administrative
expenses for that segment.
(8) New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities," which
defers the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. The Company will adopt the requirements of this statement in
fiscal year 2001.
(9) Legal
On July 2, 1999, Motorola, Inc. filed an action against the Company and four
former employees of Motorola in the Superior Court of Arizona, Maricopa County,
for unfair competition, breach of contract, misappropriation of trade secrets
and intentional interference with contractual relations. Motorola is suing to
recover its attorneys' fees, unspecified damages and other relief in this
matter. Independent of the lawsuit, a restraining order for the Company's
Arizona design center was put in place. A $0.5 million payment was made during
the second quarter of fiscal 2000 in conjunction with the placement of the
restraining order, allowing the Arizona design center to move forward with
research and development. The Company is currently in settlement discussions
with Motorola, and has accrued $1.5 million toward a possible settlement.
F-43
<PAGE>
INTEGRATED CIRCUIT SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Subsequent Event
All share and per share amounts have been retroactively adjusted to reflect
a 1.6942 to 1 stock split which will occur with the Company's initial public
offering.
F-44
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts and commissions, to be paid by
the Registrant.
<TABLE>
<S> <C>
SEC registration fee.................................................. $132,000
National Association of Securities Dealers, Inc. filing fee........... 30,500
Nasdaq National Market listing fee.................................... 5,000
Printing and engraving fees........................................... *
Legal fees and expenses............................................... *
Accounting fees and expenses.......................................... *
Blue Sky fees and expenses............................................ *
Trustee fees.......................................................... *
Directors' and Officers' Insurance.................................... *
Miscellaneous......................................................... *
--------
Total................................................................. *
========
</TABLE>
- ---------------------
* To be included by amendment
Item 14. Indemnification of Directors and Officers.
The Registrant and its subsidiary ICST, Inc. are incorporated under the laws
of the Commonwealth of Pennsylvania. Sections 1741 through 1750 of Chapter 17,
Subchapter D, of the Pennsylvania Business Corporation Law of 1988, as amended
(the "BCL") contain provisions for mandatory and discretionary indemnification
of a corporation's directors, officers and other personnel, and related
matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify directors and officers under certain prescribed
circumstances against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with an action or proceeding, whether civil, criminal, administrative or
investigative, to which any of them is a party by reason of his being a
representative, director or officer of the corporation or serving at the
request of the corporation as a representative of another corporation,
partnership, joint venture, trust or other enterprise, if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the corporation and, with respect to any criminal proceeding,
had no reasonable cause to believe his conduct was unlawful. Under Section
1743, indemnification of expenses actually and reasonably incurred is mandatory
to the extent that the officer or director has been successful on the merits or
otherwise in defense of any action or proceeding.
Section 1742 provides for indemnification in derivative actions except in
respect of any claim, issue or matter as to which the person has been adjudged
to be liable to the corporation unless and only to the extent that the proper
court determines upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for the expenses that the court deems proper.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that the representative met the
applicable standard of conduct, and such determination will be made by the
board of directors (i) by a majority vote of a quorum of directors not parties
to the action or proceeding; (ii) if a quorum is not obtainable, or if
obtainable and a majority vote of a quorum of disinterested directors so
directs, by independent legal counsel; or (iii) by the shareholders.
II-1
<PAGE>
Section 1745 provides that expenses incurred by an officer, director,
employee or agent in defending a civil or criminal action or proceeding may be
paid by the corporation in advance of the final disposition of such action or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that he or she is not
entitled to be indemnified by the corporation.
Section 1746 provides generally that, except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter 17D of the
BCL shall not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of shareholders of disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding that office.
Section 1747 also grants to a corporation the power to purchase and maintain
insurance on behalf of any director or officer against any liability incurred
by him or her in his or her capacity as officer or director, whether or not the
corporation would have the power to indemnify him or her against the liability
under Subchapter 17D of the BCL.
Section 1748 and 1749 extend the indemnification and advancement of expenses
provisions contained in Subchapter 17D of the BCL to successor corporations in
fundamental changes and to representatives serving as fiduciaries of employee
benefit plans.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter 17D of the BCL, shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs and personal representative of such person.
For information regarding provisions under which a director or officer of
the Registrant may be insured or indemnified in any manner against any
liability which he or she may incur in his or her capacity as such, reference
is made to Article 23 of the Registrant's Bylaws, which provides in general
that the Registrant shall indemnify its officers and directors to the fullest
extent permitted by Pennsylvania law. Article 23 further provides that no
director of the Registrant shall be personally liable, as such, for monetary
damages for any action taken unless the director has breached or failed to
perform the duties of his or her office, and the breach or failure to perform
constitutes self-dealing, wilful misconduct or recklessness, except with
respect to the responsibility or liability of a director pursuant to any
criminal statute, or to the liability of a director for the payment of taxes.
It is the policy of the Registrant that indemnification of, and advancement
of expenses to, directors and officers of the Registrant shall be made to the
fullest extent permitted by law.
The Registrant shall pay expenses incurred by an officer or director, and
may pay expenses incurred by any other employee or agent, in defending a
proceeding, in advance of the final disposition of such action or proceeding.
The Registrant has the authority to create a fund of any nature, which may,
but need not be, under the control of a trustee, or otherwise secure or insure
in any manner, its indemnification obligations, whether arising under the
Registrant's Bylaws or otherwise.
The Registrant has the authority to enter into a separate indemnification
agreement with any officer, director, employee or agent of the Registrant or
any subsidiary providing for such indemnification of such person as the Board
of Directors shall determine up to the fullest extent permitted by law.
The Registrant has the power to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant, whether or not the Registrant would have the power to indemnify him
against such liability under the provisions of the Bylaws or under any
provision of the BCL or other applicable law.
II-2
<PAGE>
The Registrant currently provides insurance coverage to its directors and
officers for up to $20 million.
In connection with the recapitalization, Bain Capital Fund VI, L.P. and
Bear Stearns Merchant Fund Corp., equity investors in the Registrant after the
recapitalization, have agreed to severally and not jointly, indemnify and hold
harmless Rudolf S. Gassner, John L. Pickitt and Edward M. Esber, Jr.,
directors of the Registrant who will not continue to be directors after the
recapitalization, and their respective heirs, personal representatives and
administrators, from and against any and all liabilities that any of them may
incur solely to the extent incurred directly as a result of their approval of
(i) the Confidential Information Memorandum ("Memorandum") dated February 1999
relating to proposed $145 million credit facilities ("Facilities"), (ii) a
letter from the Registrant to Credit Suisse First Boston relating to the
Memorandum, a copy of which is included in the Memorandum, (iii) the Rule 144A
Offering Circular of the Registrant relating to an offering of $100,000,000 of
Senior Subordinated Notes ("Notes"), (iv) the incurrence of any indebtedness
under the Facilities or the Notes, and (v) the engagement of Murray, Devine &
Co., Inc. to provide a solvency opinion in connection with the
recapitalization.
For information regarding provisions under which a director or officer of
ICST, Inc. may be insured or indemnified in any manner against any liability
which he or she may incur in his or her capacity as such, reference is made to
Article 23 of ICST's bylaws, which provides in general that ICST shall
indemnify its officers and directors to the fullest extent permitted by
Pennsylvania law.
The Registrant's subsidiaries, ICS Technologies, Inc. and MicroClock, Inc.,
are incorporated under the laws of the State of Delaware. Section 145 of the
General Corporation Law of the State of Delaware ("Section 145"), inter alia,
provides that a Delaware corporation may indemnify any persons who were, are
or are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses, such as
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he or she
reasonably believed to be or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable
cause to believe that his or her conduct was illegal. A Delaware corporation
may indemnify any persons who are, were or are threatened to be made, party to
any threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnify may include expenses, including
attorneys' fees, actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director has
actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
or her in any such capacity, arising out of his or her status as such, whether
or not the corporation would otherwise have the power to indemnify him or her
under Section 145.
For information regarding provisions under which a director or officer of
ICS Technologies, Inc. may be insured or indemnified in any manner against any
liability which he or she may incur in his or her capacity as such, reference
is made to Article VI of ICS Technologies' bylaws, which provides in general
that ICS Technologies shall indemnify its officers and directors to the
fullest extent permitted by and under Section 145.
II-3
<PAGE>
For information regarding provisions under which a director or officer of
MicroClock, Inc. may be insured or indemnified in any manner against any
liability which he or she may incur in his or her capacity as such, reference
is made to Article VII of MicroClock's bylaws, which provides in general that
MicroClock shall indemnify its officers and directors and authorized
representatives who was or is a party, or is threatened to be made a party to
any third party proceeding or any corporate proceeding by reason of the fact
that such person is or was an authorized representative of the MicroClock
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such proceeding if such
person acted in good faith and in a manner such person reasonably believed to
be in the best interests of MicroClock.
Item 15. Recent Sales of Unregistered Securities.
On May 11, 1999, as part of a recapitalization of the Registrant, the
Registrant issued Class A common stock, Class B common stock and Class L common
stock to affiliates of Bain Capital Inc., an affiliate of The Bear Sterns
Companies, Inc. and certain members of management of the Registrant for
consideration totaling approximately $50 million pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act.
On December 23, 1999, the Registrant issued 3,366,670 Series A Cumulative
Convertible Preferred Stock to Intel Corporation pursuant to an exemption from
registration provided by Section 4(2) of Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<C> <S>
**1.1 Form of Underwriting Agreement.
**3.1 Amended and Restated Articles of Incorporation of the Registrant.
**3.2 Amended and Restated By-laws of the Registrant.
*4.1 Indenture, dated as of May 11, 1999, between the Company and Chase
Manhattan Trust Company, National Association, as Trustee with respect
to the 11 1/2% Senior Subordinated Notes (including the form of 11
1/2% Senior Subordinated Notes).
**4.2 Form of certificate representing shares of common stock.
**5.1 Opinion of Pepper Hamilton LLP.
*10.1 Purchase Agreement, dated as of May 5, 1999, among the Company, Bear
Stearns & Co. Inc. and Credit Suisse First Boston Corporation.
*10.2 Registration Rights Agreement, dated as of May 11, 1999, among the
Company, each of the three Guarantor Subsidiaries, Bear, Stearns &
Co., Inc. and Credit Suisse First Boston Corporation.
*10.3 Consulting Agreement, dated as of May 11, 1999, between the Company
and Henry I. Boreen.
*10.4 Integrated Circuit Systems, Inc. 1999 Stock Option Plan.
*10.5 Credit Agreement, dated as of May 11, 1999, among the Company, Credit
Suisse First Boston as Administrative Agent, Sole Lead Arranger and
Collateral Agent, and the various lending institutions party thereto.
*10.6 Lease, dated as of January 29, 1999 between BET Investments IV and the
Company.
*10.7 Agreement and Plan of Merger as of January 20, 1999, between the
Company and ICS Merger Corp. (the "Recapitalization Agreement").
*10.8 Amendment No. 1 to the Recapitalization Agreement, dated as of
February 16, 1999.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
*10.9 Executive Stock and Option Agreement, dated as of May 11, 1999,
between the Company and Hock E. Tan.
*10.10 Deferred Compensation Agreement, dated as of May 11, 1999, between the
Company and Hock E. Tan.
*10.11 Stockholders Agreement, dated as of May 11, 1999, among the Company,
Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates
II, BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates
II-C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph
Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp. and
Integrated Circuit Systems Equity Investors, L.L.C.
**10.12 Amendment No. 1 to Stockholders Agreement, dated December 29, 2000.
*10.13 Employee Agreement, dated August 1, 1994, between the Company and Hock
E. Tan.
*10.14 Consultant Stock Agreement, dated as of May 11, 1999, between the
Company and Henry I. Boreen.
*10.15 Registration Agreement, dated as of May 11, 1999, among the Company,
Bain Capital Fund VI, L.P., BCIP Trust Associates II, BCIP Trust
Associates II-B, BCIP Associates II, BCIP Associates II-B, BCIP
Associates II-C, PEP Investments PTY Ltd., Randolph Street Partners
II, Randolph Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp.,
Hock E. Tan, Lewis C. Eggebrecht and Integrated Circuit Systems Equity
Investors, L.L.C.
**10.16 Amendment No. 1 to Registration Statement, dated December 29, 2000.
*10.17 Executive Stock Purchase Agreement, dated as of May 11, 1999, between
the Company and
Hock E. Tan.
*10.18 Promissory Note, dated as of May 11, 1999, executed by Hock E. Tan.
*10.19 Pledge Agreement, dated as of May 11, 1999, between the Company and
Hock E. Tan.
*10.20 Voting Agreement, dated as of May 11, 1999, among the Company, Bain
Capital Fund VI, L.P., BCIP Associates II, BCIP Trust Associates II,
BCIP Associates II-B, BCIP Trust Associates II-B, BCIP Associates II-
C, PEP Investments PTY Ltd., Randolph Street Partners II, Randolph
Street Partners 1998 DIF, L.L.C., ICST Acquisition Corp., Henry I.
Boreen, Christopher J. Bland and Barry E. Olsen.
*10.21 Employment Agreement, dated as of May 11, 1999, between the Company
and Hock E. Tan.
*10.22 Non-Compete Agreement, dated as of May 11, 1999, between the Company
and Hock E. Tan.
*10.23 Advisory Agreement, dated as of May 11, 1999, between the Company and
Bain Capital Partners VI, L.P.
*10.24 Advisory Agreement, dated as of May 11, 1999, between the Company and
ICST Acquisition Corp.
10.25 Lease Agreement, dated June 13, 1988, between VLSI Design Associates
and The Sobrato Group (Incorporated by reference to Exhibit 10.27 to
the Registrant's registration statement, No. 33-54142, on Form S-4,
filed November 3, 1992).
10.26 Lease between Turtle Beach Systems, Inc. and Winship Land Associates
III, dated May 28, 1993 (Incorporated by reference to Exhibit 10.27 to
the Registrant's 1993 Annual Report on Form 10-K).
10.27 First Amendment to lease, dated as of May 13, 1993, between the
registrant and The Sobrato Group (Incorporated by reference to Exhibit
10.28 to the Registrant's 1993 Annual Report on Form 10-K).
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
10.28 Wafer purchase contract, dated as of October 12, 1994, between the
Company and American Microsystems, Inc. (Exhibit 10 to the
Registrant's Form 10-Q for the quarter ended September 30, 1994).
10.29 Agreement, dated as of November 21, 1994, between the Company and
Edward H. Arnold (Incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended December 31, 1994).
10.30 Wafer purchase contract, dated as of November 8, 1995, between the
Company and Chartered Semiconductor Manufacturing Pte. Ltd.
(Incorporated by reference to Exhibits 10(a) and 10(b) to the
Registrant's Form 10-Q for the quarter ended December 30, 1995).
**10.31 2000 Equity Incentive Plan
**10.32 Series A Cumulative Convertible Preferred Stock Purchase Agreement by
the Registrant and Intel Corporation dated December 29, 1999.
*16.1 Letter from KPMG LLP re: Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
**23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included in Part II of the Registration Statement).
**27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* Incorporated by reference to the Registrant's Form S-4, as amended, filed
October 7, 1999.
** To be filed by amendment.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 above, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Pre-effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Norristown, Pennsylvania, on this th day of April, 2000.
Integrated Circuit Systems, Inc.
/s/ Hock E. Tan
By: _________________________________
Name:Hock E. Tan
Title:President and Chief
Executive Officer
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Pre-effective Amendment No. 1 to the Registration Statement on Form S-1 and
Power of Attorney have been signed by or on behalf of the following persons in
the capacity and on the date indicated.
Integrated Circuit Systems, Inc.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ Hock E. Tan President and Chief April , 2000
______________________________________ Executive Officer
Hock E. Tan (Principal Executive
Officer) and Director
/s/ Justine F. Lien Chief Financial Officer April , 2000
______________________________________ (Principal Financial and
Justine F. Lien Accounting Officer)
* Director April , 2000
______________________________________
Henry I. Boreen
* Director April , 2000
______________________________________
David Dominik
* Director April , 2000
______________________________________
Michael A. Krupka
* Director April , 2000
______________________________________
Prescott Ashe
* Director April , 2000
______________________________________
John D. Howard
</TABLE>
- ---------------------
* By Justine F. Lien, attorney-in-fact.
II-8
<PAGE>
SCHEDULE II
INTEGRATED CIRCUIT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years ended July 3, 1999, June 27, 1998 and June 28, 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Charged
Beginning of to Costs and Balance at
Description Period Expenses Deductions End of Period
- ------------------------ ------------ ----------------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended July 3, 1999:
Valuation reserves:
Doubtful Accounts..... $ 627 $ 430 $ 116 $ 941
Returns and
Allowances........... 1,166 43 -- 1,209
Inventory............. 3,360 2,380 600 5,140
Deferred tax
valuation............ 3,145 -- 428 2,717
Year ended June 27,
1998:
Valuation reserves:
Doubtful Accounts..... $ 212 $ 543 $ 128 $ 627
Returns and
Allowances........... 231 935 -- 1,166
Inventory............. 2,373 2,687 1,700(1) 3,360
Deferred tax
valuation............ 3,090 55 -- 3,145
Year ended June 28,
1997:
Valuation reserves:
Doubtful Accounts..... $ 230 $ 172 $ 190 $ 212
Returns and
Allowances........... 1,849 -- 1,618(1) 231
Inventory............. 2,001 372 -- 2,373
Deferred tax
valuation............ 911 2,179 -- 3,090
</TABLE>
- ----------
(1) Reflects the de-consolidation of Turtle Beach.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<C> <S> <C>
**1.1 Form of Underwriting Agreement.
**3.1 Amended and Restated Articles of Incorporation of the
Registrant.
**3.2 Amended and Restated By-laws of the Registrant.
*4.1 Indenture, dated as of May 11, 1999, between the Company and
Chase Manhattan Trust Company, National Association, as Trustee
with respect to the 11 1/2% Senior Subordinated Notes (including
the form of 11 1/2% Senior Subordinated Notes).
**4.2 Form of certificate representing shares of common stock.
**5.1 Opinion of Pepper Hamilton LLP.
*10.1 Purchase Agreement, dated as of May 5, 1999, among the Company,
Bear Stearns & Co. Inc. and Credit Suisse First Boston
Corporation.
*10.2 Registration Rights Agreement, dated as of May 11, 1999, among
the Company, each of the three Guarantor Subsidiaries, Bear,
Stearns & Co., Inc. and Credit Suisse First Boston Corporation.
*10.3 Consulting Agreement, dated as of May 11, 1999, between the
Company and Henry I. Boreen.
*10.4 Integrated Circuit Systems, Inc. 1999 Stock Option Plan.
*10.5 Credit Agreement, dated as of May 11, 1999, among the Company,
Credit Suisse First Boston as Administrative Agent, Sole Lead
Arranger and Collateral Agent, and the various lending
institutions party thereto.
*10.6 Lease, dated as of January 29, 1999 between BET Investments IV
and the Company.
*10.7 Agreement and Plan of Merger as of January 20, 1999, between the
Company and ICS Merger Corp. (the "Recapitalization Agreement").
*10.8 Amendment No. 1 to the Recapitalization Agreement, dated as of
February 16, 1999.
*10.9 Executive Stock and Option Agreement, dated as of May 11, 1999,
between the Company and Hock E. Tan.
*10.10 Deferred Compensation Agreement, dated as of May 11, 1999,
between the Company and Hock E. Tan.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<C> <S> <C>
*10.11 Stockholders Agreement, dated as of May 11, 1999, among the
Company, Bain Capital Fund VI, L.P., BCIP Associates II, BCIP
Trust Associates II, BCIP Associates II-B, BCIP Trust Associates
II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph
Street Partners II, Randolph Street Partners 1998 DIF, L.L.C.,
ICST Acquisition Corp. and Integrated Circuit Systems Equity
Investors, L.L.C.
**10.12 Amendment No. 1 to Stockholders Agreement, dated December 23,
2000.
*10.13 Employee Agreement, dated August 1, 1994, between the Company
and Hock E. Tan.
*10.14 Consultant Stock Agreement, dated as of May 11, 1999, between
the Company and Henry I. Boreen.
*10.15 Registration Agreement, dated as of May 11, 1999, among the
Company, Bain Capital Fund VI, L.P., BCIP Trust Associates II,
BCIP Trust Associates II-B, BCIP Associates II, BCIP Associates
II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph
Street Partners II, Randolph Street Partners 1998 DIF, L.L.C.,
ICST Acquisition Corp., Hock E. Tan, Lewis C. Eggebrecht and
Integrated Circuit Systems Equity Investors, L.L.C.
**10.16 Amendment No. 1 to Registration Statement, dated December 29,
2000.
*10.17 Executive Stock Purchase Agreement, dated as of May 11, 1999,
between the Company and
Hock E. Tan.
*10.18 Promissory Note, dated as of May 11, 1999, executed by Hock E.
Tan.
*10.19 Pledge Agreement, dated as of May 11, 1999, between the Company
and Hock E. Tan.
*10.20 Voting Agreement, dated as of May 11, 1999, among the Company,
Bain Capital Fund VI, L.P., BCIP Associates II, BCIP Trust
Associates II, BCIP Associates II-B, BCIP Trust Associates
II-B, BCIP Associates II-C, PEP Investments PTY Ltd., Randolph
Street Partners II, Randolph Street Partners 1998 DIF, L.L.C.,
ICST Acquisition Corp., Henry I. Boreen, Christopher J. Bland
and Barry E. Olsen.
*10.21 Employment Agreement, dated as of May 11, 1999, between the
Company and Hock E. Tan.
*10.22 Non-Compete Agreement, dated as of May 11, 1999, between the
Company and Hock E. Tan.
*10.23 Advisory Agreement, dated as of May 11, 1999, between the
Company and Bain Capital Partners VI, L.P.
*10.24 Advisory Agreement, dated as of May 11, 1999, between the
Company and ICST Acquisition Corp.
10.25 Lease Agreement, dated June 13, 1988, between VLSI Design
Associates and The Sobrato Group (Incorporated by reference to
Exhibit 10.27 to the Registrant's registration statement,
No. 33-54142, on Form S-4, filed November 3, 1992).
10.26 Lease between Turtle Beach Systems, Inc. and Winship Land
Associates III, dated May 28, 1993 (Incorporated by reference to
Exhibit 10.27 to the Registrant's 1993 Annual Report on Form 10-
K).
10.27 First Amendment to lease, dated as of May 13, 1993, between the
registrant and The Sobrato Group (Incorporated by reference to
Exhibit 10.28 to the Registrant's 1993 Annual Report on Form
10-K).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<C> <S> <C>
10.28 Wafer purchase contract, dated as of October 12, 1994, between
the Company and American Microsystems, Inc. (Incorporated by
reference to Exhibit 10 to the Registrant's Form 10-Q for the
quarter ended September 30, 1994).
10.29 Agreement, dated as of November 21, 1994, between the Company
and Edward H. Arnold (Incorporated by reference to Exhibit 10.1
to the Registrant's Form 10-Q for the quarter ended December 31,
1994).
10.30 Wafer purchase contract, dated as of November 8, 1995, between
the Company and Chartered Semiconductor Manufacturing Pte. Ltd.
(Incorporated by reference to Exhibits 10(a) and 10(b) to the
Registrant's Form 10-Q for the quarter ended December 30, 1995).
**10.31 2000 Equity Incentive Plan.
**10.32 Series A Cumulation Convertible Preferred Stock Purchase
Agreement by the Registrant and Intel Corporation, dated
December 29, 1999.
*16.1 Letter from KPMG LLP re: Change in Certifying Accountant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
**23.2 Consent of Pepper Hamilton LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included in Part II of the Registration
Statement).
**27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* Incorporated by reference to the Registrant's Form S-4, as amended, filed
October 7, 1999.
** To be filed by amendment.
<PAGE>
EXHIBIT 21
----------
SUBSIDIARIES OF REGISTRANT
NAME OF SUBSIDIARY STATE OR OTHER OTHER NAMES UNDER
JURISDICTION OF WHICH SUBSIDIARY
INCORPORATION OR DOES BUSINESS
ORGANIZATION
- --------------------------------------------------------------------------------
ICS Techologies, Inc. Delaware N/A
ICST, Inc. Pennsylvania N/A
Integrated Circuit
Systems PTE Ltd. Singapore N/A
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Integrated Circuit Systems, Inc.
The audits referred to in our report dated August 4, 1999, included the
related financial statement schedule as of July 3, 1999, and for each of the
years in the three-year period ended July 3, 1999, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the references
to our firm under the headings "Experts" and "Selected Historical Consolidated
Financial Data" in the prospectus.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 28, 2000
